Treasury Auction Demand Highest in a Year Amid Refuge Appeal

The U.S. Treasury’s $21 billion 10-year note auction attracted the highest demand in a year as investors sought a refuge amid concern that slowing growth in China will weigh on the global economy.

U.S. debt extended gains yesterday after the auction drew a bid-to-cover ratio, which gauges demand by comparing total bids with the amount of notes offered, of 2.92, the highest since March 2013. The sale’s 2.729 percent yield of was the lowest since October, and compared with the average forecast of 2.742 percent in a Bloomberg News survey of nine of the Federal Reserve’s 22 primary dealers.

“A very impressive sale,” said William O’Donnell, head U.S. government-bond strategist in Stamford, Connecticut, at Royal Bank of Scotland’s RBS Securities unit, one of the primary dealers required to bid at U.S. auctions. “If China’s slowing, and there’s barely any growth in Europe” it will be difficult “for the U.S. to break out to this orbital velocity of growth that everybody expects for this year,” he said.

The 10-year note yield dropped four basis points, or 0.04 percentage point, to 2.73 percent at 5 p.m. New York time yesterday, according to Bloomberg Bond Trader prices. It touched

2.71 percent, the lowest level since March 6. The 2.75 percent note due in February 2024 rose 10/32, or $3.13 per $1,000 face amount, to 100 5/32.

‘Duration’ Demand

China announced last week an economic growth target of 7.5 percent, the weakest since 1990, and saw its first onshore bond default after a solar-panel maker failed to make an interest payment. The nation, the biggest consumer of everything from copper to soybeans, is scheduled to release industrial output data today after reports over the weekend showed the steepest drop in exports since 2009.

“The general momentum has been good in the market because of worries around what’s going on in Asia,” said Aaron Kohli, an interest-rate strategist at primary dealer BNP Paribas SA in New York. “It suggests there’s a lot of demand for duration.”

In yesterday’s sale, direct bidders -- non-primary-dealer investors that place their bids directly with the Treasury -- purchased 27.6 percent, the highest since September, compared with 16.2 percent in February and an average of 17 percent at the past 10 sales.

Indirect bidders, a class of investors that includes foreign central banks, bought 43.4 percent of the notes sold, the lowest since October, compared with 49.7 percent at last month’s sale and an average of 43.9 at the past 10 offerings.

Primary dealers bought 29.1 percent of the securities, the lowest since March 2013.

‘Hate Bonds’

An auction of $30 billion in three-year notes on March 11 drew a yield of 0.802 percent, compared with the average forecast of 0.803 percent in a Bloomberg News survey of eight of primary dealers. The bid-to-cover ratio was 3.25, versus a 10-sale average of 3.42.

The U.S. will sell $13 billion of 30-year debt today to complete the week’s $64 billion in note and bond auctions. The sales will raise $32 billion of new cash, as maturing debt held by the public totals $32 billion, Treasury data show.

“People still love to hate bonds,” RBS’s O’Donnell said. “But when they need to buy them, they have to pay.”

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