Treasury 10-Year Note Auction Attracts Fewest Bids in 10 MonthsSusanne Walker and Daniel Kruger
The Treasury’s $21 billion 10-year note auction attracted the least demand since August, the second consecutive sale of coupon debt this week to be hampered by concern the Federal Reserve will slow its asset purchases.
The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered yesterday was 2.53, the least since the 2.49 ratio on Aug. 8. At the auction of $32 billion in three-year notes June 11, the bid-to-cover ratio was 2.95, the least since December 2010.
Yields on benchmark 10-year notes climbed this week to the highest levels in 14 months as investors speculate whether the economy is strengthening enough for Fed Chairman Ben S. Bernanke to consider tapering purchases of Treasuries and mortgage debt that have been used to keep borrowing rates low. The central bank’s Federal Open Market Committee meets June 18-19.
“There doesn’t seem to be a great deal of sponsorship at these levels,” said Kevin Flanagan, chief fixed-income strategist in Purchase, New York, for Morgan Stanley Smith Barney. “There seems to be some trepidation stepping in especially in front of the FOMC meeting. They are looking for clarity from the committee in terms of what Bernanke said a couple of weeks ago.”
The current 10-year note yield rose four basis points, or 0.04 percentage point, to 2.23 percent yesterday in New York, according to Bloomberg Bond Trader data. It touched 2.29 percent on June 11, the highest since April 2012.
The benchmark yield has increased from this year’s low of 1.61 percent set May 1.
Demand for Treasuries at auction has slackened this year amid signs of improvement with the U.S. economy. Investors have bid $2.97 for each dollar of debt sold at the U.S. government’s $958 billion in Treasury notes and bonds sold at auction, compared with a record bid-to-cover ratio of $3.15 set in 2012, according to Treasury data compiled by Bloomberg.
The 10-year notes sold yesterday yielded 2.209 percent, the highest since October 2011, versus a forecast of 2.195 percent in a Bloomberg News survey of eight of the Fed’s 21 primary dealers.
Indirect bidders, an investor class that includes foreign central banks, purchased 51.7 percent of the notes, the highest level since December 2011. That compares with an average of 35.8 percent for the past 10 sales.
Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 11.7 percent of the notes, the lowest since September. That compares with an average of 21.2 percent at the last 10 auctions.
Primary dealers were awarded 36.6 percent of the offering, compared with 49.2 percent at the May sale, the highest since January.
“The street stood back from this one to some degree,” said Dan Mulholland, head of Treasury trading at BNY Mellon Capital Markets in New York. “The street’s been beat up pretty badly” in the value of its fixed-income inventory.
Ten-year U.S. debt has lost 2.5 percent this year, compared with a 1.4 percent drop in the broader Treasury market, according to Bank of America Merrill Lynch indexes. The benchmark notes returned 4.2 percent in 2012, compared with a 2.2 percent gain by Treasuries overall. The government will auction $13 billion of 30-year bonds today.
The Fed is buying $85 billion of Treasuries and mortgage-backed securities each month to put downward pressure on borrowing costs and spur economic growth. It will slow the purchases to $65 billion a month at its October meeting, economists in a Bloomberg survey forecast last week.