Treasuries Gain as 10-Year Note Auction Yields Attract Demand

Treasuries advanced for the first time in three days as a $24 billion sale of 10-year securities at yields almost at the highest level at an auction of the maturity in two years boosted demand.

The benchmark notes gained after the auction produced a yield of 2.620 percent, compared with a forecast of 2.635 percent in a Bloomberg News survey of eight of the Federal Reserve’s 21 primary dealers. Indirect bidders, an investor class that includes foreign central banks, purchased 46.3 percent of the notes, compared with an average of 37.1 percent for the past 10 sales. Treasury will auction $16 billion in 30-year bonds tomorrow.

“Demand at the auction from investors was there across the board,” said Thomas di Galoma, head of U.S. rates sales at ED&F Man Capital Markets in New York. “Generally, it was a pretty decent auction.

The yield on the current 10-year note fell four basis points, or 0.04 percentage point, to 2.60 percent, at 5:02 p.m. in New York, according to Bloomberg Bond Trader Prices. The 1.75 percent note due in May 2023 rose 11/32, or $3.44 per $1,000 face amount, to 92 23/32.

Auction Detail

The previous 10-year auction on July 10 drew a yield of 2.67 percent, the highest level since July 2011.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 15.2 percent of the notes at the sale, compared with an average of 22.3 percent for the past 10 auctions.

The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.45, the lowest since March 2009 and compared with an average of 2.81 for the past 10 sales.

“The performance of the auction suggests that we are probably at the high end of the price spectrum, especially because we are stating down the barrel of the $16 billion in 30-year debt sales tomorrow,” said Thomas Simons, a government-debt economist in New York at Jefferies LLC, a primary dealer. “Tomorrow’s sale should give us further direction.”

Investors bid $2.91 for each dollar of the $1.313 trillion in U.S. government notes and bonds sold at auction this year, according to Treasury data compiled by Bloomberg. That’s down from the record $3.15 for the $2.153 trillion sold at last year’s offerings.

Debt Returns

Ten-year notes have lost 6 percent this year, compared with a 2.9 percent drop in the broader U.S. Treasuries market, according to Bank of America Merrill Lynch indexes. The benchmark notes returned 4.2 percent in 2012, versus a 2.2 percent gain by Treasuries overall.

Today’s offering is the second of three note and bond auctions this week totaling $72 billion. The government sold $32 billion in three-year debt yesterday.

The sales will raise $2.4 billion of new cash, as maturing securities held by the public total $69.6 billion, according to the U.S. Treasury.

“This is a decent sign for the market, which is attempting to stabilize in this newer rate range as we creep towards September and the Fed’s expected tapering,” John Briggs, a U.S. government-bond strategist at RBS Securities Inc. in Stamford, Connecticut, a primary dealer, wrote in a note to clients. The success of the sale “bodes well for tomorrow’s 30 year auction.”

Yield Forecast

Ten-year note yields will rise to 2.75 percent by the end of the year, according to 63 economists surveyed by Bloomberg News from Aug. 2 to Aug 6. Yields on the 30-year bond will rise to 3.75 percent, according to a survey of 38 economists during the same period.

Fed Bank of Cleveland President Sandra Pianalto said there has been “meaningful improvement” in the labor market and that a tapering of the central bank’s bond-buying program may be warranted if it continues to strengthen. The unemployment rate fell to 7.4 percent in July from 7.6 percent the previous month, the Labor Department reported Aug. 2.

“Employment growth has been stronger than I was expecting, and the unemployment rate today is more than half a percent lower than I projected it to be last September,” Pianalto told an audience in Cleveland today. “In light of this progress, and if the labor market remains on the stronger path that it has followed since last fall, then I would be prepared to scale back the monthly pace of asset purchases.”

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