Treasuries Fall as Fed Taper Decision Weighs on Auction DemandSusanne Walker and Cordell Eddings
Treasuries fell as speculation the Federal Reserve may announce a slowing of bond purchases as soon as today weighed on investor demand at the government’s auction of $35 billion in five-year notes.
The notes yielded 1.6 percent, compared with a forecast of 1.57 percent in a Bloomberg News poll of seven of the Fed’s 21 primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount offered, was 2.42, the least since August. The Federal Open Market Committee will issue a statement at about 2 p.m. Washington time.
“The auction was weaker than people expected, even with the Fed coming up in a few hours,” Jason Rogan, managing director of U.S. government trading at Guggenheim Securities LLC, a New York-based brokerage for institutional investors. “It’s a testament that a decent amount of people expect that the Fed might taper today, and the rest are uncertain.”
The yield on the current five-year note rose five basis points, or 0.05 percentage point, to 1.55 percent at 12:55 p.m. in New York, according to Bloomberg Bond Trader Prices. The yield on benchmark 10-year note rose four basis points to 2.88 percent.
Treasuries extended losses earlier after a Commerce Department report showed U.S. housing starts jumped 22.7 percent in November to a 1.09 million annualized rate, exceeding all forecasts of economists surveyed by Bloomberg and the most since February 2008.
“The data was good; It’s another piece of evidence the economy is improving, but improving slowly,” said Guy Haselmann, an interest-rate strategist at primary dealer Bank of Nova Scotia in New York. “They will either announce modest tapering or set the groundwork to prepare the market it’s going to happen in the January meeting.”
The housing gains followed reports this month that showed the U.S. jobless rate fell to a five-year low of 7 percent in November, retail sales increased more than forecast and a gauge of manufacturing rose at the fastest pace in more than two years.
The Fed will probably start curtailing its $85 billion in monthly bond purchases this week after unexpectedly refraining from reducing them in September, according to 34 percent of economists surveyed Dec. 6 by Bloomberg, an increase from 17 percent in a Nov. 8 survey. Twenty-six percent forecast January and 40 percent said March. The central bank buys the assets to hold down borrowing costs and fuel economic growth.
Policy makers have kept the benchmark interest-rate target for overnight loans between banks at zero to 0.25 percent since 2008. The Fed has said the tapering of bond purchases isn’t a tightening of monetary policy, and Chairman Ben S. Bernanke said last month the rate will probably stay low long after bond buying ends.
U.S. interest-rate swap spreads plunged to the narrowest on record as traders speculate the Fed may take steps to lower money market rates at today’s policy meeting.
The difference between the two-year swap rate and the comparable-maturity Treasury note yield, known as the swap spread, dropped to as low as 5 basis points, according to Bloomberg data compiled since 1988.
The gap, in part a gauge of investors’ perceptions of U.S. banking-sector credit risk, is derived from expectations for the dollar London interbank offered rate and the direction of short-term government debt yields. The spread was as much as 24.6 basis points on June 24.
Fed officials have cited cutting the interest paid to banks on excess reserves, known as the IOER, as a way to convince investors that tapering its bond purchases isn’t the same as tightening monetary policy. The rate is 0.25 percent.
Investors bid $2.88 for each dollar of the $2.095 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.
At today’s auction, indirect bidders, an investor class that includes foreign central banks, purchased 25.8 percent of the notes, the least since December 2008. That compared with an average of 46.3 percent at the past 10 sales.
“Investors are weary,” Thomas Simons, a government-debt economist in New York at Jefferies LLC, which as a primary dealer is obliged to bid in U.S. debt sales, said before the offering. “FOMC speculation drives everything, and there is just too much uncertainty to buy enthusiastically right now.”
Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 11.8 percent of the notes at the sale, compared with an average of 12.8 percent for the past 10 auctions.
Five-year notes have lost 1.5 percent this year, versus a drop of 2.7 percent by the broad Treasuries market, 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.
The government sold $32 billion in two-year debt yesterday at a yield of 0.345 percent and a bid-to-cover ratio of 3.77 percent, the highest since January. Tomorrow, it will offer $29 billion in seven-year notes and $16 billion in five-year Treasury Inflation Protected Securities.
The sales will raise $45.8 billion of new cash, as maturing securities held by the public total $66.2 billion, according to the U.S. Treasury.