Treasuries Fall as 5-Year Note Auction Demand Lowest Since 2009

Treasuries fell for the first time in five days after the U.S. sale of $35 billion in five-year notes drew the least demand in four years.

The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.38, the lowest since July 2009 and compared with an average of 2.74 for the past 10 sales. With a 1.5 percent coupon, Treasury will issue the securities as a reopening of an August 2011 debt sale. Benchmark 10-year yields rose before a report tomorrow forecast to show the economy grew more last quarter than previously estimated, fueling speculation the Federal Reserve may start to curtail monetary stimulus.

“It was a mediocre auction,” said Charles Comiskey, head of Treasury trading at Bank of Nova Scotia in New York, one of 21 primary dealers that are required to bid at the auctions. “People are waiting for more clarity from the Fed and it will come with the unemployment report and with the Fed meeting.”

The current five-year yield rose six basis points, or 0.06 percentage point, to 1.58 percent at 4:59 p.m. in New York after dropping 16 basis points during the previous three days, according to Bloomberg Bond Trader prices. The 1.375 percent note maturing in July 2018 fell 1/4, or $2.50 per $1,000 face value, to 99 2/32.

The 10-year yield added six basis points to 2.77 percent.

Auction Outcome

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, dropped to $292 billion, from $325 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 $312.7 billion.

The five-year notes sold today drew a yield of 1.624 percent, compared with a forecast of 1.618 percent in a Bloomberg News survey of eight of the Fed’s 21 primary dealers.

Treasury said the notes will have the same CUSIP number as seven-year notes sold in August 2011 that carry a 1.5 percent coupon and have about five years of remaining maturity.

“Accidental reopenings are very rare, and can be somewhat disruptive, but today’s shouldn’t be a big deal,” said Ted Wieseman, an economist at Morgan Stanley in New York. “The impact will be a slightly lower financing liquidity premium, if anything.”

Wieseman said Fed, through its bond-buying program, owns $14 billion of the previously issued securities.

Market Outcomes

“It will be difficult to squeeze in the repo market because it’s a behemoth,” said David Keeble, head of fixed-income strategy at Credit Agricole Corporate & Investment Bank in New York. “We have a lot more liquidity in the five-year sector.” The repurchase, or repo, market is based on short-term lending and borrowing of Treasuries and other securities.

Indirect bidders at the auction, an investor class that includes foreign central banks, purchased 40.3 percent of the notes, compared with an average of 44.2 percent for the past 10 sales.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 12.7 percent of the notes at the sale, compared with an average of 15.9 percent for the past 10 auctions.

Five-year notes have lost 2.6 percent this year, versus a loss of 3.1 percent for Treasuries overall, according to Bank of America Merrill Lynch indexes. The five-year securities returned 2.3 percent in 2012, while Treasuries overall rose 2.2 percent.

Today’s offering is the second of three note auctions this week totaling $98 billion. The government sold $34 billion in two-year debt yesterday at a yield of 0.386 percent, and will sell $29 billion in seven-year securities tomorrow.

Bond Outflows

The sales will raise $38.1 billion of new cash, as maturing securities held by the public total $59.9 billion, according to the Treasury.

Treasuries have lost 3.1 percent this year, including 0.5 percent this month through yesterday, according to the Bloomberg World Bond Indexes.

U.S. bond mutual funds suffered their biggest redemptions since June last week as yields reached a two-year high. Bond funds had withdrawals of $11.1 billion in the week ended Aug. 21, the Washington-based Investment Company Institute said today in an e-mailed statement. It was the largest move out of bond funds since the week ended June 26, when $28.2 billion was withdrawn.

Treasuries rose yesterday amid speculation the U.S., France and Britain are moving closer to military action against Syria after the nation’s government allegedly used chemical weapons. A United Nations team is on the ground to gather evidence to establish use of chemical warfare, Secretary-General Ban Ki Moon said today. Syrian President Bashar al-Assad’s government has denied the use of chemical weapons.

Allies Discuss

The U.K. is drafting a United Nations resolution to condemn last week’s suspected chemical attack. U.K. Prime Minister David Cameron said today the UN resolution would authorize action to protect civilians in Syria.

Treasury 10-year note yields dropped 11 basis points in the two days ending yesterday on Syria’s crisis. U.S. 10-year securities yielded 27 basis points more than bonds in an index of Group of Seven debt, down from 42 basis points more on Aug. 21, the most since May 2010, according to data compiled by Bloomberg based on closing prices.

The U.S. central bank purchased $3.3 billion of notes maturing from August 2021 to August 2023 today, according to the New York Fed’s website. Debate about when policy makers will taper $85 billion in monthly bond buying has roiled financial markets around the world in the past three months and sparked a selloff in fixed-income assets.

Gross domestic product grew at a 2.2 percent annualized rate in the second quarter, compared with an initial estimate of 1.7 percent released July 31, according a Bloomberg survey before tomorrow’s Commerce Department report.

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