Treasury Demand Slumps at 7-Year Auction on Fed’s Policy ViewDaniel Kruger
Treasury seven-year notes attracted the least demand since May 2009 after solid two- and five-year sales on speculation the Federal Reserve is moving closer to reducing bond purchases next month.
Demand at yesterday’s $29 billion auction, as measured by the bid-to-cover ratio that compares total bids with the amount of securities offered, was 2.36 compared with average for the past 10 auctions of 2.59. A $32 billion offering of two-year notes Nov. 25 attracted a 3.54 ratio, the most since April, while the Fed’s 21 primary dealers retained the smallest share of the Nov. 26 offering of $35 billion five-year debt since July. Stronger demand at the shorter-maturity auctions reflected the central bank’s statements that it will keep short-term interest rates at almost zero beyond reports of stronger economic growth.
“Forward guidance takes you out to five years” and “will keep the front end firm,” said Thomas di Galoma, head of U.S. rates sales at ED&F Man Capital Markets in New York. “The back end has got an issue. Accounts are trying to sell the back end because they’re afraid of tapering in December.”
The yield on the current seven-year note rose three basis points, or 0.03 percentage point, to 2.07 percent yesterday in New York, according to Bloomberg Bond Trader prices. The benchmark 10-year yield gained three basis points 2.74 percent.
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 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.
“The fact that the seven-year is the underperformer on the curve suggests that this was about auction concessions,” said David Ader, head of U.S. government-bond strategy at CRT Capital Group LLC in Stamford, Connecticut. “We had two auctions that both went OK.” The yield curve refers to the difference between short- and long-term yields.
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. This week’s sales will redeem $64.4 billion of maturing securities while raising $31.6 billion in new cash.
The Treasury’s two-year note auction sold at a yield of 0.3 percent, the lowest since the May sale, while the five-year note offering yielded 1.34 percent.
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.
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.
The Treasury market will be closed worldwide today for the Thanksgiving holiday, according to the Securities Industry and Financial Markets Association website. SIFMA recommended a 2 p.m. close in New York tomorrow.