No Treasuries Left for Wall Street Dealers Amid Blowout Auctions

  • Primary dealer award lowest on record at two sales this week
  • Traders cite liquidity concerns, overseas investor demand

After two notes sales this week left primary dealers with the fewest Treasuries on record, investors will get another chance to load up on U.S. government debt Thursday as seven-year securities are auctioned.

The Treasury is scheduled to sell $28 billion of seven-year notes, the last of three fixed-rate auctions this week totaling $88 billion. A gauge of demand at a $34 billion sale of five-year securities Wednesday climbed to the highest since 2014 as Wall Street dealers were awarded the lowest percentage for this maturity in data going back to 2003. A $26 billion two-year sale Tuesday also left dealers with the lowest award on record.

The offerings follow a two-week advance in Treasury note yields as several Federal Reserve officials said an interest-rate increase next month is possible and the central bank may hike more than once this year. Changes in regulation and market structure have left dealers holding fewer bonds than in the past, while more than $9 trillion in negative-yielding debt around the world has boosted the appeal of Treasuries to global buyers. 

“It shows that people prefer to buy at the auctions rather than in the secondary market -- they can get a lot of liquidity,” said John Briggs, head of strategy for the Americas in Stamford, Connecticut, at RBS Securities Inc., one of the 23 primary dealers obligated to bid at auctions. “Liquidity is not as good as it used to be. If you want to secure large blocks of Treasuries, this is the most efficient way to do it."

For an article looking at Treasury market liquidity, click here.

Treasuries were little changed Thursday, with the five-year note yield at 1.39 percent as of 6:26 a.m. New York time, according to Bloomberg Bond Trader prices. The price of the 1.375 percent security due in May 2021 was 99 29/32. Benchmark 10-year notes yielded 1.86 percent.

The five-year notes auctioned Wednesday yielded 1.395 percent as dealers bought 21.8 percent of the securities. Indirect bidders, a class of investors including foreign central banks and mutual funds, scooped up 66.6 percent, the third-most on record. Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 11.6 percent, the highest since July 2014.

Dealer Demand

Prior to the financial crisis, primary dealers underwrote most U.S. government debt issuance and acted as the Fed’s main private-sector trading partners. Today, dealers are no longer the main buyers of Treasury auctions. Overall, dealers bought 35 percent of Treasury auctions last year, down from 67 percent a decade ago, according to data compiled by Bloomberg.

Dealers took 17.7 percent at Tuesday’s two-year note auction. Indirect bidders bought 49.8 percent, while direct bidders purchased 32.5 percent, the most since 2012.

The May 2023 securities scheduled to be sold Thursday yielded 1.685 percent in pre-auction trading, compared with 1.634 percent at a previous sale of seven-year debt on April 28.

Traders see a 34 percent probability that the Fed will raise rates next month, up from a 12 percent chance assigned at the beginning of this month, according to futures data compiled by Bloomberg. Dallas Fed President Robert Kaplan, who doesn’t vote on policy this year, said Wednesday that the Fed ought to act in the near future to remove accommodation.

Fed Chair Janet Yellen may trigger more bets on a tightening in policy when she comments on the economy Friday at Harvard University’s Radcliffe Institute for Advanced Study.

“Treasuries seem to be hanging around waiting for Yellen,” said Richard Kelly, head of global strategy at Toronto Dominion Bank in London. “I don’t think data are there just yet to support June though, so we should be able to get a bit of a rally from current levels.”

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