Treasury 5-Year Turns Into Unscheduled Reopening of 7-Year Note

The U.S. Treasury’s sale of $35 billion in five-year notes turned into additional issuance of seven-year notes sold in 2011, the first so-called unscheduled reopening of a security since 2004.

With the five-year yielding 1.624 percent at yesterday’s sale, the notes were assigned a 1.5 percent coupon, matching the interest payout on the seven-year security issued in August 2011 with the same 2018 maturity date. The debt sold yesterday will be classified as a five-year note, according to the Treasury Department.

“It was an interesting occurrence, but the issue will just trade like an old seven-year note,” said Gabriel Mann, a U.S. government-bond strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut, one of 21 primary dealers obligated to bid at the auctions. “There is minimal risk of thin liquidity in the issue.”

The Federal Reserve, through its bond-buying program, holds $14 billion, or 47 percent, of $29 billion outstanding of the seven-year debt, which would ensure no lack of supply for investors seeking to borrow the security to sell it in a short transaction, Mann said. A short position is a bet a security’s price will fall.

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.

‘Very Rare’

“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.”

Treasuries fell for the first time in five days yesterday after the five-year notes drew the least demand in four years.

The current five-year yield rose six basis points, or 0.06 percentage point, to 1.58 percent 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 8/32, or $2.50 per $1,000 face value, to 99 1/32. The 10-year yield added six basis points to 2.77 percent.

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. The notes 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 primary dealers.

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.

Bid Patterns

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.

“These yields were not as attractive, given some general optimism about the recovery and the broader risk of tapering next month,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut.

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.

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

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

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