Treasuries Gain as Demand at Note Auction Rises to Two-Year High

  • Bid-to-cover ratio at seven-year note sale is most since 2014
  • Bond-market inflation gauge climbs to highest since July

Treasuries gained for a second day, erasing earlier losses, after demand rose to the highest in more than two years at an auction of seven-year notes.

Benchmark 10-year note yields fell after the U.S. sold $28 billion in seven-year securities. Bonds had declined earlier after a Commerce Department measure of inflation tied to personal spending advanced 2.1 percent, the most in four years and in line with the Federal Reserve’s 2 percent target. Stocks fell, reversing an earlier advance, and oil pared gains.

“The strength of the auction easily sparked about a two-basis-point rally, because we were beginning to drift lower in prices as oil moved up,” said Jim Vogel, head of interest-rate strategy at FTN Financial in Memphis, Tennessee. Thursday’s stock-market tumble was “enough to bring in an awful lot of buying in Treasuries on that. The futures buying in Treasuries that we saw going into the end of the day was some of the heaviest we’ve seen in weeks.”

The yield on the 10-year note fell three basis points, or 0.03 percentage point, to 1.82 percent as of 5 p.m. in New York, according to Bloomberg Bond Trader data. The price of the 1.625 percent note due February 2026 was 98 7/32.

The 10-year break-even rate, which measures the difference between yields on 10-year notes and equivalent Treasury Inflation-Protected Securities, rose for a ninth day. That rate, a gauge of the expected annual inflation pace over the next decade, climbed to 1.72 percentage points, the highest since July.

“The various inflation and price trend data are all hovering at or above the 2 percent ‘price stability’ mandate,” said Russ Certo, a managing director at Brean Capital in New York.

The seven-year notes sold at a yield of 1.634 percent. The bid-to-cover ratio, a gauge of demand, rose to 2.65, the highest since February 2014, from 2.51 at last month’s sale. Primary dealers were awarded 20.2 percent of the notes, the second-lowest amount on record.

Yield Curve

The gap between yields on two-year notes, which are sensitive to Fed policy, and 30-year bonds, which are more influenced by expectations for inflation and economic growth, rose for the first time in three days. The measure, known as the yield curve, climbed two basis point to 1.89 percentage points.

Traders aren’t fully pricing in another Fed interest-rate increase until next year, after the central bank on Wednesday left rates unchanged. Policy makers in March cut their median forecast for 2016 rate increases to two from four.

U.S. data also showed gross domestic product grew at a 0.5 percent annualized rate,  the slowest pace in two years and lower than the 0.7 percent median projection in a Bloomberg survey.

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