Treasury 7-Year Note Auction Attracts Most Demand Since December

The Treasury’s auction of $29 billion of seven-year notes attracted the highest demand this year as investors looked past a report on weekly jobless claims that pointed to an improving U.S. labor market.

The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.71, the highest since December and compared with an average of 2.66 at the past 10 sales. The notes were sold at a yield of 1.155 percent, compared with a forecast of 1.163 percent in a Bloomberg News survey of nine of the Federal Reserve’s 21 primary dealers. Yields on 10-year notes were little changed as volatility in the Treasuries market reached a record low for a fourth consecutive day.

“The auctions went really well,” said Christopher Sullivan, who oversees $2.2 billion as chief investment officer at United Nations Federal Credit Union in New York. “Even at these rich levels, we still see Treasuries garnering considerable interest. We expect a continuation of these levels of volatility through the foreseeable future.”

Benchmark 10-year notes yielded 1.71 percent at 4:59 p.m. New York time, according to Bloomberg Bond Trader data. The price of the 2 percent note due February 2023 fell 1/32, or 31 cents per $1,000 face amount, to 102 19/32. The yield fell to 1.64 percent on April 23, the lowest since Dec. 12.

The yield on current seven-year notes was 1.12 percent, after dropping to 1.06 percent two days ago, the least since Dec. 12.


“The seven-year was well-received,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors. “It’s hard to go long when you are at these levels. Maybe there’s some reluctance to get involved at these frothy levels.” A long position is a bet an asset will increase in value.

Indirect bidders, a class of investors that includes foreign central banks, bought 39.3 percent of the seven-year notes today, also the highest since December and compared with 35.5 percent at the March sale. The average for the past 10 sales is 38.6 percent.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 19.7 percent at today’s sale, compared with 19.5 percent at last month’s auction of the securities. The average at the past 10 auctions is 16.7 percent.

The auction is the final of three note sales this week totaling $99 billion.

Auction Demand

Seven-year notes have gained 1.1 percent this year, compared with a 0.7 percent return by Treasuries overall, according to Bank of America Merrill Lynch indexes. The seven-year securities returned 3.9 percent in 2012, while Treasuries overall advanced 2.2 percent.

Bidding has slowed at Treasury auctions this year, with the $721 billion in debt sales attracting an average of $3.01 in orders to buy per dollar of debt sold, compared with a record $3.15 in 2012, data released by the Treasury and compiled by Bloomberg show.

The sales this week will raise $59.05 billion of new cash, as maturing securities held by the public total $57.95 billion, according to the U.S. Treasury.

Yields rose as high as 1.72 percent today after a report showed fewer Americans than forecast filed jobless claims. Applications for jobless benefits decreased by 16,000 to 339,000 in the week ended April 20, the lowest since March 9, according to Labor Department data released in Washington.

Weekly Claims

Economists projected 350,000 jobless claims, according to the median estimate in a Bloomberg survey of 49 economists, with estimates ranging from 340,000 to 370,000. The Labor Department revised the previous week’s figure up to 355,000, from an initially reported 352,000. A spokesman said the claims data typically bounce around this time of year.

“We’re going to be in a period of somewhat soft data for a little while,” said Jefferies’s Simons. “Q3 is when it starts to pick up; the economic data is going to improve a little bit.”

Treasury volatility as measured by Bank of America Merrill Lynch’s MOVE index fell to a record 49.39 basis points, below the low of 49.75 basis points reached yesterday, as the Fed supports the market with asset buying under its quantitative-easing program. The data stretches back to 1988.

The Fed is buying $85 billion of Treasury and mortgage debt a month to prop up the economy by putting downward pressure on borrowing costs. At their meeting last month, several members of the Federal Open Market Committee advocated slowing purchases and stopping them by year-end.

Since then, seven have voiced support for maintaining the current pace, including five who vote on the policy-making panel: Governor Daniel Tarullo, New York Fed President William C. Dudley, James Bullard of St. Louis, Chicago’s Charles Evans and Boston’s Eric Rosengren.

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