Treasuries Gain 4th Day After Weaker-Than-Average 10-Year Sale

Treasuries gained for a fourth day after weaker-than-average demand at the first 10-year note auction of the year left yields at levels that boosted the appeal of the safest assets.

Yields on the benchmark security fell from almost an eight-month high after the bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, at the sale of $21 billion in notes was 2.83, compared with an average of 3 for the previous 10 sales. The percentage bought by direct bidders, institutional investors outside of the Fed’s 21 primary dealers, dropped to 14.8 percent from 42.7 percent at the December auction, the second highest on record.

“People are buying the securities post-auction,” said George Goncalves, head of interest-rate strategy at Nomura Holdings Inc., a primary dealer. “Investors were gun shy heading into the auction, because of how aggressive and unpredictable the direct bid has been of late. A lot of investors thought they would be there, and they weren’t.”

The yield on the current 10-year note declined one basis point, or 0.01 percentage point, to 1.86 percent at 4:59 p.m. in New York, according to Bloomberg Bond Trader prices. The 1.625 percent security maturing in November 2022 rose 3/32, or 94 cents per $1,000 face value, to 97 29/32.

The yield last week jumped 20 basis points, touching 1.97 percent on Jan. 4, the highest since April 26, after U.S. lawmakers reached a budget deal to avoid the so-called fiscal cliff and the Fed in December announced plans to increase its monthly purchases of government and mortgage debt.

Enthusiasm ‘Abated’

“It came a little weaker than people anticipated -- there was a pretty decent short-covering bid going into it,” said Thomas di Galoma, a managing director at Navigate Advisors LLC, a brokerage for institutional investors in Stamford, Connecticut. The recent run-up in Treasury prices, he said, “may have abated some of the enthusiasm for the auction.”

The drop in demand by direct bidders, a group that includes pension funds and insurance companies, echoes a similar drop in August, when participation fell to 5.2 percent from a record 45.4 percent in July.

Yesterday’s three-year note auction saw direct bidders purchase a record amount for the second straight sale.

“The fluctuations in the direct-bid percentage is a wild card for the dealer community, and it wasn’t there today,” said Dan Mulholland, head of U.S. Treasury trading in the capital-markets unit of BNY Mellon Corp. in New York. “Prior to the auction, there was quite a bit of buying, which probably had people covering shorts before the auction. Once that cleared, buying resumed and we’re starting to see some of the market absorb some of the duration.”

Yield Curve

Indirect bidders, an investor class that includes foreign central banks, purchased 28.5 percent of the notes today, compared with an average of 38.1 percent for the past 10 sales.

Ten-year U.S. debt has lost 1.1 percent this year, according to a Bank of America Merrill Lynch indexes, compared with a 0.6 percent loss in the broader Treasury market. The notes returned 4.2 percent in 2012, compared with a 2.2 percent gain by Treasuries overall.

The difference between the yields on two-year notes and 10-year securities, the so-called yield curve, narrowed to 1.62 percentage points, down from 1.69 percentage points on Jan. 4, the widest since May.

The yield curve typically narrows when investors anticipate a slow economic recovery because they demand less compensation for the risk of inflation.

The government is selling $66 billion of notes and bonds this week. It sold $32 billion of three-year securities yesterday and is due to auction $13 billion of 30-year debt tomorrow.

The sales this week will raise $24.4 billion of new cash, as maturing securities held by the public total $41.6 billion, according to the Treasury.

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