Treasury Yields Fall From Almost 11-Month High

Treasury 10-year note yields declined from almost the highest level in 11 months as the government’s $21 billion auction of the securities drew the strongest demand since October.

The notes yielded 2.029 percent, compared with a forecast of 2.057 percent in a Bloomberg News survey of eight of the Federal Reserve’s 21 primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.19, versus 2.68 at the February sale. Treasury yields climbed earlier after U.S. retail sales rose last month twice as much as forecast.

“It shows a very nice bid,” Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee, said in a telephone interview. “We fought off some really heavy selling on the morning economic numbers and still came back and bought the auctions.”

The yield on the benchmark 10-year note rose less than one basis point, or 0.01 percentage point, to 2.02 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. It increased earlier to 2.05 percent. The yield reached 2.08 percent on March 8, the highest level since April 5. The price of the 2 percent security due in February 2023 slipped 1/32, or 31 cents per $1,000 face amount, to 99 26/32.

Volume Increases

Treasuries trading volume rose 28 percent today to $290 billion, the highest level since March 8’s $384 billion, according to ICAP Plc, the largest inter-dealer broker of U.S. government debt. The average daily volume for the past year is $248 billion.

Indirect bidders, an investor class that includes foreign central banks, purchased 47.7 percent of the notes sold today, the most since the December 2011 auction. That compared with 28 percent at the Feb. 13 offering and an average of 36 percent at the past 10 sales.

Direct bidders, non-primary dealer investors that place their bids directly with the Treasury, bought 30 percent, versus an average of 21.8 percent at the past 10.

Primary dealers purchased 22.3 percent of the notes today, compared with an average 42.3 percent at the past 10 auctions of the maturity.

It was “a very strong auction,” said Michael Cloherty, head of U.S. interest-rate strategy in New York at Royal Bank of Canada’s RBC Capital Markets, which as a primary dealer is required to bid at U.S. debt auctions. “Despite the strong retail sales data and the strong payroll data, we’ve been holding this range, we’ve been seeing some demand on yields above 2 percent on 10s.”

Today’s sale was a reopening of the February offering, with the notes due in February 2023.

Repo Rate

Benchmark 10-year notes today were the highest in demand, or on “special,” in the repurchase-agreement, or repo, market, where firms borrow and lend securities. The securities’ repo rate closed at negative 2.95 percent, with traders willing to pay to borrow the securities in exchange for loaning cash.

“Before the reopenings, you tend to see the 10-year trade pretty special in repo markets,” said Aaron Kohli, an interest-rate strategist in New York at the primary dealer BNP Paribas SA. “What happens is that people are buying up a lot of the 10-year, and then those who want to short it or sell it are having difficulty borrowing it.”

Ten-year U.S. debt has lost 1.9 percent this year, according to Bank of America Merrill Lynch indexes, almost double the 1 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 government will sell $13 billion of 30-year bonds tomorrow. It auctioned $32 billion of three-year notes yesterday at a yield of 0.411 percent.

Cheap Level

Treasury securities due in a decade and more are trading at almost the cheapest level since 2011 relative to global peers with similar maturities, Bank of America Merrill Lynch indexes show. Yields on the Treasuries were 54 basis points higher on March 8 than those in an index of other sovereign debt of comparable maturity, the most since August 2011, according to the data. The spread was 52 basis points yesterday.

The 10-year term premium, a model created by the Fed that includes expectations for interest rates, growth and inflation, was negative 0.58 percent after reaching 0.56 percent on March 11, the least-costly level since April 5. A negative reading indicates investors are willing to accept yields below what’s considered fair value. The average over the past year is negative 0.78 percent.

Retail Sales

Sales at U.S. retailers in February rose 1.1 percent, following a revised 0.2 percent gain in January, Commerce Department figures showed in Washington. The median forecast in a Bloomberg survey was for a 0.5 percent advance. Sales excluding automobiles and gasoline climbed 0.4 percent, versus a forecast for a gain of 0.2 percent.

Yields on Treasuries dropped yesterday for the first time in seven days after climbing last week as stronger-than-forecast U.S. economic data spurred demand for higher-yielding assets. Nonfarm payrolls increased by 236,000 jobs in February, the Labor Department reported March 8, versus a Bloomberg survey forecast for 165,000.

The Fed purchased $1.46 billion today in Treasuries due from February 2036 to February 2043. The central bank has been buying $85 billion of bonds each month under the quantitative-easing stimulus strategy since the start of the year to try to hold down borrowing costs and spur economic growth.

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