U.S. 10-Year Sale Demand Limits Dealers to Least in Year

The 22 banks and investment firms that underwrite U.S. debt were left with the smallest share of a U.S. Treasury 10-year note auction in more than a year amid rising demand from pension funds and foreign central banks.

The Federal Reserve’s primary dealers bought 29.1 percent of the $24 billion in benchmark notes sold yesterday, matching the lowest amount since March 2013. This came even as the debt was sold at yield of 2.612 percent, the most expensive level since June 2013. Fed Chair Janet Yellen earlier told lawmakers a “high degree” of accommodation remains warranted, tempering forecasts for an acceleration of interest-rate increases.

“Those who showed up at the auction stepped up their participation -- a signal of their confidence in the variables that have promoted the strong performance of the long end,” said Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York. “The market has been enthralled by the long end this year.”

The auction yield compared with 2.72 percent at the last offering on April 9 and the 2.77 percent average at the previous 10 sales. A Bloomberg News survey of eight of the primary dealers drew a forecast of 2.613 percent.

The bid-to-cover ratio, which gauges auction demand by comparing total bids with the amount of securities offered, was

2.63, the lowest since June 2013. That compares with an average of 2.67 for the previous 10 sales.

Bidder Participation

Direct bidders, non-primary-dealer buyers, purchased 21.6 percent of the securities, the highest since March and compared with an average of 18.4 percent at the past 10 auctions.

Indirect bidders, an investor class that includes foreign central banks, purchased 49.3 percent of the notes, the most since February. That compares with an average of 44.1 percent for the past 10 sales.

Ten-year notes have returned 4.8 percent this year, compared with a 2.5 percent gain in the broader U.S. Treasuries market, according to Bank of America Merrill Lynch indexes. The benchmark notes lost 7.8 percent in 2013, versus a 3.4 percent decline by Treasuries overall.

Treasury long-term notes and bonds were the world’s best-performing government securities over the past month amid tamed inflation and slowing economic growth.

‘Perfect Storm’

Yellen told the congressional Joint Economic Committee that data show “solid growth” in the second quarter, bolstering the case for a faster expansion this year. Still, she said, “many Americans who want a job are still unemployed” and inflation remains low.

The Fed chief also cited “heightened geopolitical tensions” as a risk to growth. She’s scheduled to address the Senate Budget Committee today.

“It’s been a perfect storm for the Treasury rally,” said Jason Rogan, managing director of U.S. government trading at Guggenheim Securities LLC, a New York-based brokerage for institutional investors. “The message is that, even in light of strong economic data and Fed tapering, the market is still being driven by geopolitical issues, extremely weak inflation.”

The Fed’s preferred measure of inflation, the personal consumption expenditures deflator, rose 1.1 percent in March from a year ago, a report on May 1 showed. The gauge has fallen short of the bank’s 2 percent target for almost two years.

The U.S. sold $29 billion of three-year debt May 6 at a yield of 0.928 percent and will auction $16 billion of 30-year securities today.

“There has been, and remains, sustained demand for the long end of the curve, and shorts are still feeling the pain,” said Aaron Kohli, an interest-rate strategist in New York at BNP Paribas SA, which as a primary dealer is obligated to bid at Treasury auctions. A short is a bet prices will fall. Investors will watch today’s auction “to see if the unending demand for the long end continues.”

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