Treasuries Drop as Auction Attracts Weakest Demand Since August

Treasury 30-year bonds fell as the U.S. government’s sale of $13 billion of the securities attracted the weakest demand in seven months amid signs the recovery in the world’s biggest economy is gathering momentum.

The auction’s bid-to-cover ratio, which gauges demand by comparing total bids with the amount of debt offered, was 2.43, the lowest since August, versus 2.74 at last month’s offering. The sale was the final of three note-and-bond auctions this week totaling $66 billion. Treasuries slid earlier as U.S. jobless claims unexpectedly fell, fueling risk appetite.

“There was less demand in general after yesterday’s pretty strong auction, as we are still in somewhat of a bearish environment,” said Paul Horrmann, a broker in New York at Tradition Asiel Securities Inc., an interdealer broker. “That said, we could be set up for a rally given these higher yields.”

The yield on 30-year bonds increased two basis points, or 0.02 percentage point, to 3.24 percent at 5 p.m. in New York, according to Bloomberg Bond Trader Prices. It touched 3.26 percent after reaching 3.28 percent on March 8, the highest level since April 5. The price of the 3.125 percent security due in February 2043 declined 3/8, or $3.75 per $1,000 face amount, to 97 27/32.

Benchmark 10-year note yields rose one basis point to 2.03 percent and reached 2.07 percent. They touched 2.08 percent on March 8, the highest since April.

Bond Auction

Treasuries trading volume rose 8 percent today to $313.7 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 $247 billion.

The long-bond sale drew a yield of 3.248 percent, the highest since March 2012. That compared with an average forecast of 3.243 percent in a Bloomberg News survey of seven of the Federal Reserve’s 21 primary dealers, who are obliged to bid in U.S. debt offerings.

Indirect bidders, an investor class that includes foreign central banks, purchased 42 percent of the bonds, compared with 36.4 percent at the Feb. 14 bond sale and an average of 35.8 percent for the past 10 offerings.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 4.9 percent, the least since September 2009, versus 14.5 percent at the previous sale and an average of 15.8 percent for the past 10.

Primary dealers bought 53.1 percent of the securities, the most since October.

Shows Reluctance

“Dealers own a bit more than they usually do,” said David Ader, head of U.S. government-bond strategy at CRT Capital Group LLC in Stamford, Connecticut. “It demonstrates reluctance to get involved.”

Long bonds have lost 5.1 percent this year, compared with a 1 percent decline in the broader U.S. Treasuries market, according to Bank of America Merrill Lynch indexes.

The U.S. sold $21 billion of 10-year debt yesterday at a yield of 2.029 percent, compared with a forecast of 2.057 percent in a Bloomberg survey of eight primary dealers. The government auctioned $32 billion of three-year notes on March 12 at a yield of 0.411 percent, below the 0.413 percent average forecast in a Bloomberg survey.

A daily close by the 10-year yield above 2.06 percent, which would be the first since April 2012, would confirm weakness in the note, said George Davis, chief technical analyst for fixed income in Toronto at Royal Bank of Canada’s RBC Capital Markets unit. The yield has risen this year in an ascending-channel pattern, a chart formation that shows higher highs and higher lows over time.

‘Bearish Tone’

“The market continues to exhibit the bearish tone we’ve seen since December, and will continue if we breach 2.06 percent, a significant level,” Davis said in a telephone interview. “We are in for more of a gradual grind higher in yields instead of a spike, given the Fed’s continued purchases. But any rally should be seen as a selling opportunity.”

The Fed is buying $85 billion of Treasury and mortgage debt each month to spur the economy. It purchased $3.34 billion today of Treasuries maturing from May 2020 to February 2023.

“Yield rises are limited until increased expectation that the Fed will scale back easing,” said Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York. “The Fed has put a ceiling on rates.”

Treasuries fell earlier as the Labor Department reported initial claims for unemployment benefits fell by 10,000 to 332,000 in the week ended March 9, the fewest since mid-January. A Bloomberg survey forecast an increase to 350,000.

Ten- and 30-year yields reached the highest levels in 11 months on March 8 after the department said U.S. payrolls increased by 236,000 jobs last month, more than forecast.

Inflation Bets

Traders’ inflation expectations rose today. The yield gap between 10-year notes and Treasury Inflation Protected Securities, called the 10-year break-even rate, increased to 2.59 percentage points, the widest since Sept. 17 on a closing basis. The gap signals traders’ outlook for consumer prices over the life of the debt. It has averaged 2.35 over the past year.

Consumer prices rose 1.9 percent in February from a year earlier, a Bloomberg survey forecast before data tomorrow.

Treasury securities due in a decade and more traded at almost the cheapest level since 2011 relative to global peers with comparable maturities, according to the Bank of America indexes. Yields on Treasuries were 54 basis points higher on March 8 than those in an index of other sovereign debt, the most since August 2011, the data showed. The spread was 53 basis points yesterday.

Before it's here, it's on the Bloomberg Terminal.