Treasuries Rise After U.S. Sells $35 Billion in Notes

Treasuries climbed for a second day as the U.S. auctioned $35 billion in five-year notes to stronger-than average demand amid concern harsh weather may be masking a fundamental slowdown in the economy.

The sale’s bid-to-cover ratio, which gauges demand by comparing total bids with the amount of debt offered, was 2.98, the highest since September 2012. Durable-goods orders fell last month, a report tomorrow is forecast to say, after other data has showed drops in retail sales and consumer confidence. Investors will weigh Senate testimony tomorrow by Janet Yellen, chair of the Federal Reserve, which is reducing its bond-buying.

“The auction was tremendous,” said Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc., one of 22 primary dealers that are obligated to bid in U.S. debt sales. “We could go to lower yields throughout the rest of the day. The market is data-dependent. Figure after figure is weaker than market consensus.”

The yield on the current five-year note dropped four basis points, or 0.04 percentage point, to 1.48 percent at 5 p.m. in New York, according to Bloomberg Bond Trader Prices. It touched 1.47 percent, the lowest level since Feb. 20. The price of the 1.5 percent security due in January 2019 increased 5/32, or $1.56 per $1,000 face amount, to 100 1/8.

The benchmark 10-year note yield sank four basis points to 2.67 percent and reached 2.66 percent, the lowest since Feb. 7. Thirty-year bond yields decreased three basis points to 3.62 percent, the least since Feb. 5.

Volume Increases

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, increased 22 percent to $357 billion, the highest since Feb. 20. The average this year is $323 billion.

At the five-year note auction, indirect bidders, an investor class that includes foreign central banks, purchased 50.7 percent of the five-year notes, compared with an average of 44.6 percent for the past 10 sales.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 9.2 percent, versus an average of 11.9 percent for the past 10 auctions.

The notes yielded 1.53 percent, the lowest at a five-year offering since November, compared with an average forecast of 1.539 percent in a Bloomberg News survey of seven of the Fed’s primary dealers.

Floater Sale

The offering was the third of four note auctions this week totaling $109 billion, including sale earlier today of $13 billion of two-year floating-rate securities at a high discount margin of 0.064 percent. The bid-to-cover ratio at the floater sale, the second offering of the securities, was 5.29, versus 5.67 percent at the January auction.

“Second auctions are usually weaker than the first, and that considered, this auction was pretty good and almost a carbon copy,” said Thomas Simons, a government-debt economist in New York at primary dealer Jefferies LLC. primary dealers. “The Treasury should be happy with how these are going. There is a market developing for these.”

Investors have bid 3.12 times the $349 billion of Treasury notes and bonds sold by the government this year. If the $28 billion of floating-rate notes sold in January and February were excluded, the bid-to-cover ratio would be 2.91, compared with 2.87 for all of 2013, Treasury data compiled by Bloomberg show.

The government sold $32 billion in fixed-rate two-year debt yesterday at a yield of 0.340 percent. Tomorrow, it will offer $29 billion in seven-year notes.

Treasuries pared gains earlier after U.S. new-home sales unexpectedly rose last month. They increased 9.6 percent to a 468,000 annualized pace, the most since July 2008, figures from the Commerce Department showed.

Durable Goods

Durable-goods orders fell 1.7 percent in January, a Commerce Department report is forecast to show tomorrow. A separate report yesterday showed the Conference Board’s index of U.S. consumer confidence decreased to 78.1 this month from a revised 79.4 in January. Retail sales unexpectedly fell 0.4 percent last month, the Commerce Department reported Feb. 13.

Ten-year notes have traded in a 12 basis-point range for the past two weeks, from 2.66 percent to 2.78 percent, amid the uneven economic data and harsh winter weather. The range over the past year has been from 1.61 percent to 3.05 percent.

“Uncertainty around the weather story and how much impact is it having on the economic data is keeping rates in a range,” said Shyam Rajan, an interest-rate strategist at primary dealer Bank of America Merrill Lynch in New York.

Investor Flows

Investor flows of $250.5 million into exchange-traded funds of U.S. fixed income securities on Feb. 25 were below the 20-day average of $960 million and the five-day mean of $323 million, suggesting a diminished appetite for debt, according to ETF data compiled by Bloomberg.

Investors have favored ETFs investing in U.S. stocks, which took in $3.9 billion on Feb. 25, above the 20-day average of $2.7 billion, Bloomberg data show.

U.S. fixed-income ETFs have taken in $17 billion so far this year, compared with $15.9 billion in outflows from domestic equity funds, Bloomberg data show.

Yellen is scheduled to testify tomorrow to the Senate Banking Committee, reporting on monetary policy and the economic outlook. She delivered the report to a House panel Feb. 11, but her appearance in the Senate was postponed because of a storm.

The Fed chief pledged to the House Financial Services Committee to scale back stimulus in “measured steps” and signaled the bar is high for any change in that plan.

The Fed cut its bond-buying program by $10 billion a month in January and in February, reducing purchases to $65 billion, citing economic improvement. It bought $1.25 billion of Treasuries today due from May 2038 to February 2043 as part of the program, which is designed to hold down long-term borrowing costs and spur growth.

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