Treasury Demand Rises From Lowest in 4 Years on Fed Bets, Budget

Demand at the Treasury’s five- and seven-year note sales this week bounced back from the lowest levels in four years as investors bet the Federal Reserve will keep buying bonds and a deadlock in Washington risked a government shutdown.

The bid-to-cover ratio at yesterday’s seven-year sale, which gauges demand by comparing total bids with the amount of debt offered, was 2.46, after dropping last month to 2.43, the weakest since May 2009. The ratio at the five-year note sale on Sept. 25 was 2.67, the most in four months, after falling to

2.38 in August, the least since July 2009.

“The Washington story gaining traction and the lack of taper have given the market strength,” said Carlos Pro, an interest-rate strategist at Credit Suisse Group AG in New York, one of the Fed’s 21 primary dealers, which are obligated to bid at U.S. debt sales. “The uncertainty that has been introduced as far as the outlook for monetary and fiscal policy has been a big driver in the return of demand for Treasuries, and that combo should keep us lower in yield.”

Treasuries are poised for a third weekly gain amid a confrontation between President Barack Obama and House Republicans over the federal budget. If Congress can’t agree on a stopgap spending bill, the federal government faces a shutdown of non-essential services on Oct. 1, the start of the fiscal year. Separately, Congress must vote to raise the nation’s borrowing limit.

Benchmark U.S. 10-year note yields have slid eight basis points this week, or 0.08 percentage point, to 2.65 percent. Seven-year yields have dropped eight basis points to 2.03 percent, and five-year yields have declined four basis points to

1.44 percent.

Yields Dropped

Seven- and five-year note yields have fallen from more than two-year highs of 2.46 percent and 1.85 percent they closed at on Sept. 5, a day before the government reported slower-than-forecast jobs growth in August. The Fed unexpectedly decided Sept. 18 to refrain from reducing the monthly debt purchases it uses to damp borrowing costs and boost growth.

The Sept. 24 auction of $32 billion of two-year notes, the shortest-maturity U.S. coupon debt, drew a yield of 0.348 percent, below a forecast of 0.354 percent in a Bloomberg News survey of seven primary dealers.

Fed Chairman Ben S. Bernanke said policy makers would await more evidence of sustained growth before tapering debt purchases. Treasuries fell earlier after Fed policy makers signaled they’re comfortable with reducing monetary stimulus if the economy continues to expand.

‘Stretched Out’

“The path of any potential taper has been stretched out into the future,” said Gabriel Mann, a U.S. government bond strategist at Royal Bank of Scotland Group AG’s RBS Securities unit in Stamford, Connecticut, a primary dealer. “The repricing of Fed expectations and the trouble in Washington have given Treasuries, across the curve, value.”

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

Yesterday’s seven-year note auction drew a yield of 2.058 percent, compared with a forecast of 2.059 percent in a Bloomberg News survey of 10 primary dealers.

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

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 17.8 percent of the notes, compared with an average of 19.53 percent for the past 10 auctions.

Coupon Match

The sale of five-year notes on Sept. 25 turned into additional issuance of seven-year notes sold in 2011, the second straight so-called unscheduled reopening of the security.

With the five-year yielding 1.436 percent, the notes matched the 1.375 percent coupon interest payout on the seven-year security issued in September 2011, with the same 2018 maturity date.

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.

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