U.S. Sells $35 Billion of Five-Year Notes
A U.S. sale of $35 billion of five-year notes drew the strongest demand in more than three years from an investor class that includes foreign central banks after weaker-than-estimated economic data eased speculation that the Federal Reserve will soon reduce monetary stimulus.
Indirect bidders purchased 53 percent of the notes, the most since January 2010, at the offering yesterday. That compared with an average of 41.7 percent at the past 10 sales. The auction of five-year debt due in June 2018 drew the lowest overall demand since 2009. It yielded 1.484 percent, the highest since July 2011, versus a forecast of 1.472 percent in a Bloomberg News survey of seven of the Fed 21 primary dealers.
“People were really concerned about this particular maturity after the selloff we’ve seen,” said Tom Simons, an economist in New York at Jefferies LLC, which as a primary dealer is obligated to bid in U.S. debt sales. “This looked like the flashpoint where you could have had a bad auction, but there was demand at these levels.”
The current five-year note yield fell seven basis points, or 0.07 percentage point, to 1.42 percent yesterday in New York, according to Bloomberg Bond Trader data, halting five days of increases. The yields have more than doubled since reaching a 2013 low of 0.65 percent on May 2.
Treasuries gained yesterday, pushing 10-year yields down for the first time in eight days, as Commerce Department data showed the U.S. economy grew at a slower rate in the first quarter than previously estimated. Gross domestic product rose an annualized 1.8 percent from January through March, instead of the 2.4 percent previously calculated, the figures showed, easing concern the Fed is moving closer to slowing bond buying.
Ten-year (USGG10YR) yields reached 2.66 percent on June 24, the highest level since August 2011, after Fed Chairman Ben S. Bernanke said last week policy makers may reduce bond purchases this year and end them in mid-2014 if economic growth is in line with their projections. Policy makers are forecasting growth of as much as 2.6 percent this year and 3.5 percent in 2014.
The Fed has been buying $85 billion of bonds every month to put downward pressure on borrowing costs.
At yesterday’s auction, the bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 2.45 percent, the least since September 2009. The average for the past 10 auctions was 2.84.
Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 3.6 percent of the securities, the lowest level since November 2009. The average at the past 10 auctions was 16.9 percent.
“Despite the weak bid-to-ask, the overall street demand was still acceptable given the volatile markets,” George Goncalves, head of interest-rate strategy at the primary dealer Nomura Holdings Inc., wrote in a note to clients. “All things considered, this is a slightly weak auction, which we award a B-minus on our grade scale.”
Five-year notes are at almost the cheapest they’ve been in nearly two years, according to the butterfly chart spread formed by Treasury two-, five- and seven-year yields.
The spread, which measures how well the five-year note is performing against the two other securities, is about 49 basis points, almost the highest since July 2011. A positive reading indicates investors are more bearish on the middle security, making it relatively cheap versus the others. The average over the past five years has been 37 basis points.
Five-year notes have lost 2.8 percent this year through June 25, versus a drop of 3.1 percent by the broad Treasuries market, according to Bank of America Merrill Lynch indexes. The five-year debt has dropped 1.9 percent since the June 19 Fed meeting.
The auction was the second of three note offerings this week totaling $99 billion. The government sold $35 billion of two-year notes on June 25 and will auction $29 billion of seven-year debt today.
The sales will raise $40.7 billion of new cash, as maturing securities held by the public total $58.3 billion, according to the U.S. Treasury.
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