- The 22 primary dealers wind up with 24.1% of auction
- U.S. wraps up sales of $56 billion of notes, bonds this week
Demand was so strong for the U.S. Treasury’s sale of 30-year debt that Wall Street bond dealers were left with the lowest percentage ever for an auction of the maturity.
The $12 billion offering lured buyers after a report showed U.S. consumer prices rose less in March than analysts had forecast. With inflation tame and negative rates around the world pushing investors into higher-yielding debt, long bonds have surged about 10 percent in 2016, more than double the gain of the broader U.S. government-debt market, according to Bank of America Merrill Lynch data.
The attraction of the bonds for overseas buyers isn’t hard to grasp. The auction yield of 2.596 percent compares with 0.85 percent on similar-maturity debt from Germany and about 0.4 percent in Japan. In Thursday’s U.S. offering, the 22 primary dealers purchased 24.1 percent, a historically low level in data going back to 2006. Indirect bidders, a category that includes foreign central banks and mutual funds, bought about 65 percent, the most since September and the third-highest on record.
“The auction had very strong customer participation,” said Thomas Roth, senior Treasuries trader in New York at Mitsubishi UFJ Securities USA Inc. "People have nowhere else to go.”
Benchmark 30-year Treasury yields rose two basis points, or 0.02 percentage point, to 2.6 percent as of about 4:59 p.m. New York time, according to Bloomberg Bond Trader data. The price of the 2.5 percent security due in February 2046 was 97 29/32. Benchmark 10-year note yields rose three basis points to 1.79 percent, after falling last week to the lowest since February.
The sale drew a yield lower than the 2.617 percent level indicated in a pre-sale Bloomberg survey. The Treasury wrapped up three note and bond sales this week totaling $56 billion. Wednesday’s sale of 10-year notes also drew strong participation from indirect bidders. The group bought 60 percent, up from 56.5 percent at the March sale. The notes yielded 1.765 percent, compared with an estimate of 1.780 percent in a Bloomberg survey.
Long bonds have been the biggest beneficiaries as the U.S. inflation rate holds below the Federal Reserve’s 2 percent target. The U.S. consumer price index rose 0.9 percent in March from a year earlier, compared with the 1 percent increase that was the median forecast in a Bloomberg survey.
Demand for 30-year debt has shrunk the extra yield the maturity offers over two-year notes to about 1.8 percentage points, from about 2 percentage points at the start of the year, data compiled by Bloomberg show.
The auction also benefited as Fed Bank of Atlanta President Dennis Lockhart said he will no longer push for a rate increase this month in light of weakening growth and still-low inflation.
Consumer spending and business investment “seem to be softening, and, yes, that gives me pause,” Lockhart said in a Bloomberg Radio and Television interview. His remarks come three weeks after he said the economy had enough momentum to justify higher rates as soon as this month.
Policy makers held their benchmark rate unchanged last month, after lifting it from near zero in December. They also released projections indicating officials see the potential for two rate increases this year, down from a December forecast of four hikes in 2016.
Futures contracts indicate traders assign about a 53 percent chance that the Fed will raise rates this year. The calculation assumes the effective fed funds rate will average 0.625 percent after the next hike.
"The Fed has made a dovish shift," Carl Eichstaedt, senior portfolio manager at Western Asset Management Co., said in an interview on Bloomberg TV. "The conditions are there for Fed tightening. They are going to be more cautious. Two Fed hikes this year is not unreasonable."