Treasury Yields Increase as U.S. Auctions $64 Billion of Notes

Treasuries declined, with 10-year yields climbing from a two-month low, as the U.S. auctions $64 billion of notes, the first time it conducts two fixed-coupon debt sales in a single day since October 2008.

U.S. debt remained lower after the sale of $35 billion of five-year notes, which will be followed by a $29 billion sale of seven-year notes. Treasuries fell earlier after a report showed the economy expanded at a 3.2 percent pace in the fourth quarter. Bonds rose yesterday as a slide in emerging-market assets boosted demand for the safest fixed-income securities.

“In the context of an auction doubleheader, the first leg of supply has gone fine, making seven-years this afternoon the wild card,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “The fear was that people wouldn’t show up. Since fives went all right, sevens might find decent sponsorship.”

The yield on the current five-year note rose five basis points, or 0.05 percentage point, to 1.54 at 11:33 a.m. in New York, according to Bloomberg Bond Trader Prices.

The yield on the 10-year note gained five basis points to 2.72 percent. The 2.75 percent note due November 2023 slipped 3/8, or $3.75 per $1,000 face amount, to 100 7/32. The yield dropped seven basis points yesterday, and touched 2.66 percent, the least since Nov. 19.

Note Sale

The five-year notes yielded 1.572 percent at auction, compared with a forecast of 1.570 percent in a Bloomberg News poll of six of the Fed’s 21 primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount offered, was 2.59, versus an average of 2.60 for the past 10 sales.

Indirect bidders, a class of investor that includes foreign central banks, bought 44.6 percent of the notes at the December sale, the most since November. The average at the past 10 auctions was 44.8 percent.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 10.7 percent of the notes, the least since July and compared with an average of 12.5 percent at the past 10.

Treasury trading volume at ICAP, the largest interdealer broker of U.S. government debt, rose to $494 billion yesterday, the highest level since June 24.

The Fed said yesterday it will stick to its plan for a gradual withdrawal from departing Chairman Ben S. Bernanke’s unprecedented easing policy. It cut its monthly bond purchases to $65 billion from $75 billion.

Fed Policy

It has undertaken three rounds of bond buying since 2008 under the quantitative-easing stimulus strategy, swelling its balance sheet to a record $4.1 trillion.

The Fed had been forecast to continue reducing purchases by $10 billion at the meeting yesterday and each one following to end the stimulus program this year, according to analysts in a Jan. 10 Bloomberg News survey.

U.S. 10-year yields will rise to 3.42 percent by the year-end, economists forecast. Investors who bought the securities today would lose about 3 percent during the period, according to data compiled by Bloomberg.

The economy’s fourth quarter expansion matched forecasts in a Bloomberg survey of economists before the Commerce Department released the figure today. Gross domestic product expanded 4.1 percent in the third quarter, the most in almost two years.

Home Sales

Pending sales of existing homes in the U.S. fell 8.7 percent in December, more than forecast, as higher borrowing costs and bad weather held back sales, the National Association of Realtors said in Washington. The decline was the biggest since May 2010, after a revised 0.3 percent drop in November that was initially reported as a gain. The median projection in a Bloomberg survey of economists called for the index to drop 0.3 percent.

Demand for Treasuries was supported amid a selloff of emerging-market currencies and as data signaled China’s manufacturing is decelerating.

HSBC Holdings Plc and Markit Economics said their purchasing managers’ index for China was at 49.5 in January, compared with the previously reported 49.6 on Jan. 23 and 50.5 for December.

Investors are pulling money from exchange-traded funds that track emerging markets at the fastest rate on record. More than $7 billion flowed from ETFs investing in developing-nation assets in January, the most since the securities were created, data compiled by Bloomberg show.

“Fixed-income assets have profited from risk-off sentiment,” said Piet Lammens, head of research at KBC Bank NV in Brussels. While the emerging-market turmoil “keeps a lid” on rates in the short-term, “the underlying trend should be towards higher yields,” he said.

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