Treasuries Fall as 7-Year Demand Lowest Since 2009 on Fed Views

Treasuries fell for the first time in five days as a strengthening economy added to concern the Federal Reserve is closer to reducing bond purchases and held demand at the government’s auction of seven-year notes.

The bid-to-cover ratio at the auction, which gauges demand by comparing total bids with the amount of securities offered, was 2.36, the least since May 2009. Demand was higher at auctions of two- and five-year notes the past two days amid speculation the central bank will keep short-term interest rates lower for longer. Reports showed improvements in consumer sentiment while the Chicago Business Barometer was higher than forecast and initial claims for unemployment insurance declined last week to the lowest level in two months.

“The auction was very sloppy,” said Thomas di Galoma, head of U.S. rates sales at ED&F Man Capital Markets in New York. “Forward guidance takes you out to five years. Seven years is no man’s land.”

The benchmark 10-year yield gained three basis points, or 0.03 percentage point, to 2.74 percent at 5 p.m. New York time. The price of the 2.75 percent note maturing in November 2023 dropped 1/4, or $2.50 per $1,000 face amount, to 100 3/32. The yield is up 19 basis points this month, the first increase since August.

The yield on the current seven-year note rose three basis points to 2.07 percent.

Market Hours

The Treasury market will be closed worldwide tomorrow for the Thanksgiving holiday, according to the Securities Industry and Financial Markets Association website. SIFMA recommended a 2 p.m. close in New York on Nov. 29.

The bid-to-cover ratio at the note auction, which gauges demand by comparing total bids with the amount of securities offered, was 2.36, compared with an average of 2.59 for the previous 10 sales. The seven-year notes drew a yield of 2.106 percent, compared with the forecast of 2.088 in a Bloomberg News survey of six of the Fed’s 21 primary dealers.

Indirect bidders, an investor class that includes foreign central banks, purchased 34.1 percent of the notes, compared with an average of 40.7 percent for the past 10 sales.

Direct bidders, non-primary dealer investors that place their bids directly with the Treasury, purchased 16.1 percent of the notes, compared with an average of 19.4 percent at the last 10 auctions.

Auction Demand

Investors bid $2.86 for each dollar of the $1.964 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.

The $179 billion of debt sold in October attracted an average bid-to-cover of 2.85, the third consecutive monthly increase and the highest demand since May.

Seven-year notes have lost 2.7 percent this year, versus a drop of 2.2 percent for Treasuries overall, according to Bank of America Merrill Lynch indexes. The seven-year securities returned 3.9 percent in 2012, while Treasuries overall gained 2.2 percent.

Today’s offering was the last of three note auctions this week totaling $96 billion. The government sold $32 billion in two-year debt on Nov. 25 and $35 billion in five-year securities yesterday. This week’s sales will redeem $64.4 billion of maturing securities while raising $31.6 billion in new cash.

Economic Reading

The Thomson Reuters/University of Michigan final index of consumer sentiment in November unexpectedly rose to 75.1 from 73.2 a month earlier. The median forecast of 65 economists surveyed by Bloomberg called for 73.1 after a preliminary reading of 72.

The MNI Chicago Report business barometer fell to 63 in November, compared with a median forecast for 60 in a Bloomberg News survey, from 65.9 a month earlier. Results above 50 signal expansion. The Conference Board index of leading economic indicators unexpectedly rose 0.2 percent, compared with a median forecast for no change in a Bloomberg News survey.

Recent data has showed signs of economic strength, as retail sales last month rose 0.4 percent versus forecast for a 0.1 percent gain, and as nonfarm payrolls expanded by 204,000 jobs in October, more than the 120,000 forecast in a Bloomberg News survey.

The strength of “the data is comforting,” said Charles Comiskey, head of Treasury trading at Bank of Nova Scotia in New York, a primary dealer. “It has to be followed by a stronger employment report. If not, then tapering is off for December.”

Fed Buys

The central bank plans to purchase $45 billion in Treasuries in December via 18 operations, including two each on Dec. 3 and Dec. 19, according to a statement published on the Fed Bank of New York website.

Fed Chairman Ben S. Bernanke said last week the central bank will probably hold down its target interest rate long after ending $85 billion in monthly bond purchases. The Federal Open Market Committee meets Dec. 17-18.

“We see a slight increase in Treasury yields into year-end,” said Hendrik Lodde, a fixed-income strategist at DZ Bank AG in Frankfurt. “They probably won’t start to taper this year, March could be the date. It’s data-based so if the unemployment rate comes down fast maybe we’ll change our view.”

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