Treasuries Fall as U.S. Auctions $29 Billion of Notes

Treasuries declined for the first time in five days as the U.S. sold $29 billion in seven-year debt to weaker-than-average demand even as the deadlock in Washington over the federal budget risked a government shutdown.

The auction’s bid-to-cover ratio, which gauges demand by comparing total bids with the amount offered, was 2.46, versus an average of 2.63 for the past 10 sales of the notes. The yield on the 10-year benchmark note climbed from almost a six-week low after a report showed U.S. jobless-benefit claims unexpectedly fell. Yields had fallen since the Federal Reserve decided last week not to slow its bond-buying program.

“It was a lackluster auction,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “We’ve seen gains for the last four consecutive sessions. The combination of the claims data and the supply proved to be a small negative for the Treasury market. Thursday is a bit of a give-back on the recent gains.”

The yield on the current seven-year note increased two basis points, or 0.02 percentage point, to 2.03 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. The price of the 2.125 percent security due in August 2020 declined 1/8, or $1.25 per $1,000 face amount, to 100 5/8.

Ten-year note yields advanced two basis points to 2.65 percent after falling yesterday to 2.61 percent, the lowest level since Aug. 12. They reached a two-year high of 3.01 percent on Sept. 6.

The Bloomberg U.S. Treasury Bond Index has risen 0.9 percent this month. It is little changed this quarter and down 2.4 percent for 2013. The Bloomberg Global Developed Sovereign Bond Index has gained 1.6 percent this month and has dropped 3.6 percent in 2013.

Volatility Rises

Volatility in Treasuries as measured by the Bank of America Merrill Lynch MOVE index rose 3 percent to 77.6, above the 2013 average of 71.89. It climbed on Sept. 5 to 114.2, the highest level in two months.

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, rose 2 percent to $328 billion, from $321.7 billion yesterday. The average this year is $316 billion

A slide below zero in rates on some Treasury bills that mature beyond October showed little investor angst that U.S. lawmakers may fail to agree on a federal-debt limit.

Congress hasn’t passed a budget for the 2014 fiscal year, which starts Oct. 1. The House and Senate are at odds over using the measure to stop funding the nation’s three-year-old health-care law, President Barack Obama’s signature legislative achievement, and the lack of an agreement could lead to a government shutdown.

Debt Ceiling

Separately, Congress must vote to raise the nation’s borrowing limit. U.S. Treasury Secretary Jacob J. Lew told lawmakers yesterday in a letter that measures to avoid breaching the debt ceiling will be exhausted on Oct. 17.

Rates on three-month Treasury bills fell below zero today for the first time since December, reaching negative 0.0051 percent before ending the day at zero. They closed yesterday at 0.0152 percent.

Treasury bills that mature Oct. 24 were at a rate of 0.030 percent, up from 0.018 percent yesterday. Two years ago, one-month bills jumped to 0.18 percent on July 29, 2011, the highest since February 2009, as Congress pushed to the Aug. 2, 2011, deadline set by Treasury to avoid a default.

“People are selling one-month bills to buy three-month bills to get out of the window of likely delayed payments due to a mishap on the debt ceiling,” said Ira Jersey, an interest-rate strategist in New York at primary dealer Credit Suisse Group AG.

Note Auction

The seven-year notes auctioned today yielded 2.058 percent, compared with a forecast of 2.059 percent in a Bloomberg News survey of 10 of the Fed’s 21 primary dealers. Last month’s offering of the securities drew a yield of 2.221 percent, the highest level since July 2011.

Indirect bidders, an investor class that includes foreign central banks, purchased 42 percent of the notes today, compared with an average of 40.2 percent at the past 10 auctions.

Direct bidders, non-primary dealer investors that place their bids directly with the Treasury, bought 17.8 percent, versus an average of 19.5 percent at the past 10 sales.

Seven-year notes have lost 3.2 percent this year, compared with a return of 3.9 percent in 2012, according to Bank of America Merrill Lynch indexes.

Investors bid $2.87 for each dollar of the $1.618 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.

Third Sale

Today’s offering was the last of three note auctions this week totaling $97 billion. The government sold $33 billion in two-year debt on Sept. 24 and $35 billion in five-year securities yesterday.

The sales this week, along with last week’s $13 billion 10-year Treasury Inflation Protected Securities auction, will raise $47.7 billion of new cash, as maturing securities held by the public total $62.3 billion, according to the Treasury.

Treasuries fell earlier as a Labor Department report showed initial claims for jobless benefits in the U.S. unexpectedly decreased by 5,000 to 305,000 in the week ended Sept. 21. An official at the agency said there were no special factors and California has caught up with a recent backlog of new applications stemming from a computer system changeover.

The median forecast of 49 economists surveyed by Bloomberg called for an increase to 325,000.

Any Tools

Minneapolis Fed President Narayana Kocherlakota, a voter on policy next year, said the central bank must do “whatever it takes” to strengthen a job market that is healing too slowly.

The Fed should be “willing to use any of its congressionally authorized tools to achieve the goal of higher employment, no matter how unconventional those tools might be,” Kocherlakota said today in a speech in Houghton, Michigan.

The central bank refrained from tapering its $85 billion in monthly bond purchases after a Sept. 17-18 policy meeting, saying it needs more evidence of lasting improvement in the economy.

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