Treasuries Rise as Note Sale Lures Most Overseas Bids Since 2011

Treasuries rose, with seven-year note yields falling to almost the lowest in a week, after the sale of $29 billion of the debt attracted the most demand since 2011 from an investor class that includes foreign central banks.

Indirect bidders purchased 49.9 percent of the notes, compared with an average of 42.7 percent for the past 10 sales. U.S debt strengthened on reports that Russian President Vladimir Putin warned Ukraine against continuing its anti-separatist offensive, fueling refuge demand. Treasuries fell earlier following a report from the Commerce Department that durable-goods orders climbed in March more than forecast, adding to evidence the economy is strengthening.

“The auction was decent, given the flight-to-quality flows we’ve seen,” said Jason Rogan, managing director of U.S. government trading at Guggenheim Securities LLC, a New York-based brokerage for institutional investors. “No one wants to be too short going in to the weekend, given what seems like an increase in aggression in Russia.” A short position is a bet that an asset will decline in value.

The yield on the current seven-year note fell two basis points, or 0.02 percentage point, to 2.27 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. The price of the 2.25 percent securities maturing in March 2021 gained 3/32, or 94 cents per $1,000 face amount, to 99 27/32.

Benchmark 10-year note yields fell two basis points to 2.68 percent. The yield rose as much as three basis points.

Auction Detail

The seven-year notes were sold at a yield of 2.317 percent, compared with a forecast of 2.306 percent in a Bloomberg News survey of seven of the Federal Reserve’s 22 primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.60, compared with an average of 2.55 for the previous 10 sales.

Direct bidders, non-primary dealer investors that place their bids directly with the Treasury, purchased 19.1 percent of the notes, compared with an average of 20.7 percent at the last 10 auctions.

“Once the auction cleared, it seemed like the market resumed its bid and the long-end took the reins,” said Dan Mulholland, head of Treasury trading at BNY Mellon Capital Markets in New York. “We have this low-inflation, moderate growth expectation going forward,” as well as demand for long-term debt from pension funds, he said.

Investors have reduced the gaps between note and bond yields in 2014 as they bet Fed rate increases in coming years in reaction to faster economic growth will hurt shorter maturities, while a low inflation outlook will benefit longer-term debt. The spread between seven- and 30-year debt shrank to as little as 1.18 percentage points, the least since October 2009.

Debt Returns

Investors have bid 3.04 times the $742 billion of notes and bonds sold by the U.S. Treasury this year, compared with 2.87 times last year and 3.15 times in 2012, the record high, according to Treasury data compiled by Bloomberg.

Seven-year notes have returned 2.1 percent this year, tracking a gain of 2.1 percent for the broad Treasuries market, according to Bank of America Merrill Lynch indexes. The seven-year securities declined 4.8 percent in 2013, while Treasuries overall fell 3.4 percent.

Today’s offering is the last of three note auctions this week. The government also sold $35 billion of five-year notes yesterday at a yield of 1.732 percent. It auctioned $32 billion of fixed-rate two-year notes on April 22 at a yield of 0.447 percent.

This week’s note offerings, plus an $18 billion sale of five-year Treasury Inflation Protected Securities on April 17 and a $15 billion auction of two-year floating-rate debt on April 29, total $129 billion. The sales will raise $56.8 billion of new cash, as maturing securities held by the public total $72.2 billion, according to the Treasury.

Economic Progress

Putin warned Ukraine against continuing its anti-separatist offensive after government troops killed five rebels and prompted Russia’s military to begin drills on the two nations’ border.

One-month Treasury bill rates reached negative 0.005 percent for the first time since Feb. 18.

Orders for goods meant to last at least three years increased 2.6 percent, the biggest gain since November, after rising 2.1 percent in the prior month, a Commerce Department report showed. The median forecast of economists surveyed by Bloomberg called for a 2 percent advance.

Fed policy makers are winding down the bond-purchase program they have used to support the economy. They have kept their target for overnight lending between banks in a range of zero to 0.25 percent since December 2008. The policy-setting Federal Open Market Committee meets April 29-30.

Futures prices put the likelihood the Fed will start raising borrowing costs in June 2015 at 49 percent, compared with 61 percent a month earlier, based on trading on the CME Group Inc.’s exchange.

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