Treasury 5-Year Auction Demand Surges After Rise in Yields

The Treasury’s sale of $35 billion of five-year notes attracted the most interest from non-primary dealer investors since at least 2003 as the highest yield in 13 months bolstered demand.

Indirect and direct bidders combined to win about 67 percent of yesterday’s offering, compared with an average of about 57 percent at the 10 previous auctions. The notes were sold at what is known as a high yield of 1.045 percent, the most for the security at an auction since October 2011.

“Indirects and directs stepped up,” said William O’Donnell, head U.S. government bond strategist at RBS Securities Inc. in Stamford, Connecticut, one of 21 primary dealers that are obligated to bid at U.S. government debt auctions. “After a weak two-year auction yesterday, it looks like we may have gone back far enough to attract some money into the market.”

The Treasury’s $35 billion sale of two-year debt on May 28 attracted the fewest bids for the securities since February 2011. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.04, compared with an average of 3.72 for the past 10 sales.

The current five-year note yield fell three basis points or 0.03 percentage point to 0.99 percent, according to Bloomberg Bond Trader data. The 0.625 percent note due April 2018 rose 1/8, or $1.25 per $1,000 face value, to 98 1/4.

Auction Details

At the five-year auction, the bid-to-cover ratio was 2.79, compared with an average of 2.84 for the previous 10 sales. The yield of 1.045 percent was below the 1.051 percent forecast by a Bloomberg News survey of seven primary dealers before the offering.

Primary dealers bought 32.6 percent of the notes, the least since at least 2003. Indirect bidders, an investor class that includes foreign central banks, purchased 44 percent of the notes, compared with an average of 41.6 percent for the past 10 sales.

Direct bidders, non-primary dealer investors that place their bids directly with the Treasury, purchased 23.3 percent of the notes, compared with an average of 15.1 percent at the last 10 auctions.

The U.S. will auction $29 billion of seven-year securities today. The auctions, including Treasury Inflation-Protected Securities offered last week, will raise $53.5 billion of new cash, as maturing securities held by the public total $58.5 billion, according to the U.S. Treasury.

Investors have bid $2.99 for each dollar of the $876 billion in Treasury notes and bonds sold at auction so far this year compared with a record bid-to-cover ratio of $3.15 set in 2012.

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