Treasury Auction Demand Slumps to 7 Month Low Amid Higher PricesCordell Eddings and Daniel Kruger
Demand for Treasuries at this week’s note and bond auctions fell to the weakest level in seven months as two of the securities reached the highest prices this year, stoking bets the rally may have gone too far, too fast.
The $69 billion of three-, 10- and 30-year debt sold by the Treasury drew the lowest demand for the monthly series of auctions of the maturities since October. The ratio of bids to debt sold was 2.83 times, compared with 2.99 times in April.
Demand at the $16 billion sale of 30-year bonds yesterday was the weakest since August 2011, with a bid-to-cover ratio of 2.09. The average at the past 10 long-bond offerings was 2.36. The long bond has returned 12 percent this year as of May 7, the most for that period in data compiled by Bank of America going back to 1988, as low inflation has persisted.
“The investor community is taking a breather,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “The performance suggests a near-term peak. But we are still in a range, and shouldn’t stray far from these levels.”
The bond sale followed auctions of $29 billion of three-year notes on May 6 at a yield of 0.928 percent and $24 billion of 10-year securities the day after at 2.612 percent.
The yield on the current 30-year bond rose three basis points, or 0.03 percentage point, to 3.43 percent yesterday in New York, according to Bloomberg Bond Trader prices. The yield fell earlier as much as three basis points to 3.37 percent and touched 3.35 percent on May 5, the lowest level since June 19. Its high this month was 3.48 percent on May 1.
Shorter-term Treasuries rose. Five-year note yields decreased three basis points to 1.63 percent, and three-year notes fell three basis points to 0.86 percent. Benchmark 10-year note yields yielded 2.62 percent.
The difference between yields on five- and 30-year Treasuries widened to 181 basis points after narrowing on May 2 to 168 basis points, the least since 2009. The flattening of the yield curve over the past month came amid bets longer-term bonds would benefit from the outlook for inflation below the Federal Reserve’s 2 percent target, while shorter-term debt would be hurt by projections for the central bank to raise interest rates next year.
“We rallied hard coming into the auction process, and the curve was too flat,” said Thomas Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “We needed a concession, but the trend is still to higher prices. There is underlying demand for the paper.”
The 10-year note auction’s bid-to-cover ratio was 2.63, the lowest since February, versus an average of 2.67 at the past 10 sales. The three-year note sale had a coverage ratio of 3.4, versus 3.36 at the April sale.
Investors have bid 3.05 times the $826 billion of notes and bonds sold by the U.S. this year, up from 2.87 times last year, which was down from a record 3.15 times in 2012, according to Treasury data compiled by Bloomberg. The record for demand at auctions is 3.15 set in 2012 when the Treasury sold $2.153 trillion of notes and bonds.
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.