Treasuries Rise After Auction as U.S. Syria View Fuels Refuge

Treasuries rose for a fourth day after the U.S. sold $34 billion in two-year notes at a lower-than-forecast yield as concern turmoil in Syria may lead to wider military conflict boosted refuge demand.

Benchmark 10-year notes extended their longest winning streak in six weeks as the Obama administration is constructing the legal and political justification for a limited military strike on Syria that would demonstrate international censure against chemical weapons. The notes drew a yield of 0.386 percent, compared with a forecast of 0.390 percent in a Bloomberg News survey of seven of the Federal Reserve’s 21 primary dealers.

“The situation with Syria seems to be building up to some action, so you get a safety bid,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “It was a decent auction. It came in line with expectations.”

The U.S. 10-year yield dropped eight basis points, or 0.08 percentage point, to 2.71 percent at 4:59 p.m. in New York, according to Bloomberg Bond Trader prices, the longest run of declines since July 11. The 2.5 percent benchmark note due in August 2023 rose 21/32, or $6.56 per $1,000 face amount, to 98 6/32.

The yield on the current two-year note fell one basis point to 0.36 percent.

Index Extension

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, rose to $322.67 billion, from $187 billion yesterday. The figure is down from a 2013 high of $662 billion reached on May 22 and up from a low of $148 billion on Aug. 9. The 2013 average is $313 billion.

U.S. debt was supported by month-end buying to match market indexes. Funds that manage portfolios against benchmark indexes, including the Barclays U.S. Aggregate Index, typically buy longer-maturity Treasuries at almost month-end to align the interest-rate sensitivity of their holdings with the indexes.

The Barclays index will extend its duration, the measure of rate-sensitivity, by 0.11 year on Sept.1, compared with 0.10 year on Aug. 1.

Treasuries have lost investors 3.4 percent this year, including 0.9 percent in August, according to Bloomberg U.S. Treasury Bond Index.

The central bank today purchased $5.2 billion in Treasuries maturing between August 2017 and May 2018 as part of its government-debt-buying program.

The bid-to-cover ratio at today’s auction, which gauges demand by comparing total bids with the amount of securities offered, was 3.21, the most since April and versus an average of 3.49 for the past 10 sales.

Bid Pattern

Indirect bidders, an investor class that includes foreign central banks, purchased 19.3 percent of the notes, the least since January and compared with an average of 25.5 percent for the past 10 sales.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 26.1 percent of the notes at the sale, the most since April and compared with an average of 23.8 percent for the past 10 auctions.

Today’s offering is the first of three note auctions this week totaling $98 billion. The government will sell $35 billion in five-year debt tomorrow and $29 billion in seven-year securities on Aug. 29.

The five-year note yield touched 1.51 percent, the lowest level in more than a week, after rising to 1.72 percent on Aug. 23, the highest level since July 2011. A reasonable range for the five-year is 1.52 percent to 1.62 percent, said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee.

Key Range

“People will settle for the auction in this range,” Vogel said. “People’s plans have been changed by the global reaction to Syria and the potential aftermath there.”

This week’s sales will raise $38.1 billion of new cash, as maturing securities held by the public total $59.9 billion, according to the U.S. Treasury.

Treasuries investors remained bearish this week, betting that the prices of the securities will fall, according to a survey by JPMorgan Chase & Co. The proportion of net shorts was at 2 percentage points in the week ending yesterday, the same as the previous week according to JPMorgan.

About 19 percent were short in the week ending Aug. 26, down from 21 percent in the week ending Aug. 19. The percentage of investors in the survey betting that Treasury prices will increase dropped to 17 percent, from 19 percent. A long position is a bet prices will rise.

Client Sentiment

About 64 percent of the clients surveyed by the primary dealer were neutral in the week ending yesterday, up from 60 percent the previous week. The firm does not disclose the number of clients in the survey.

“We’ve backed up considerably over the last couple of weeks,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc.

The Fed’s debate about when to taper $85 billion in monthly bond buying has roiled financial markets around the world and sparked a selloff in fixed-income assets. The central bank will vote to scale back stimulus at its Sept. 17-18 meeting, according to 65 percent of economists surveyed this month by Bloomberg.

Treasury 10-year note yields have risen from a 2013 low of 1.61 percent on May 1 and reached a two-year high of 2.93 percent on Aug. 22. The rise in yields has halted by renewed concern about the U.S. debt ceiling.

Treasury Secretary Jacob J. Lew yesterday told Congress in a letter that the U.S. will hit the $16.7 trillion debt ceiling in mid-October and urged lawmakers to raise the limit as soon as possible.

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