U.S. Five-Year Notes Sell at Lowest Yield in Six MonthsCordell Eddings and Daniel Kruger
The U.S. sale of $35 billion of five-year notes drew the lowest yield in six months as a European bond rally bolstered the attractiveness of U.S. government securities.
The notes yielded 1.513 percent at auction yesterday, the least since November. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of debt offered, was 2.73, versus an average of 2.65 at the past 10 sales. Treasuries rose earlier along with government securities across Europe as an unexpected jump in German unemployment fueled bets the European Central Bank will introduce further stimulus next week.
“It was a strong auction, given the strength that we saw coming in,” said Sean Murphy, a trader in New York at Societe Generale SA, one of 22 primary dealers obliged to bid at U.S. debt auctions. “In the global safe-bond world, the U.S. looks relatively cheap. And we are seeing that play out in the strength of Treasuries.”
The yield on the current five-year note fell five basis points, or 0.05 percentage point, to 1.48 percent at 5 p.m. yesterday in New York, according to Bloomberg Bond Trader prices. The yield on the benchmark 10-year note fell seven basis points to 2.44 percent.
Indirect bidders, a class of investors that includes foreign central banks, purchased 50.4 percent of the notes, the most since March, and higher than the average of 45.2 percent for the past 10 sales.
Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 10.5 percent of the notes, compared with an average of 12.9 percent for the past 10 auctions.
“We’ve seen nothing but buying, and five-year notes look cheap relative to the rest of the Treasury curve,” Aaron Kohli, an interest-rate strategist primary dealer BNP Paribas SA in New York, said before the auction. “Investors have money to put to work, and there are only so many safe assets available. As a result, Treasuries have been a beneficiary.”
Five-year notes have returned 2 percent this year, versus a gain of 3.1 percent by the broad Treasuries market, according to Bank of America Merrill Lynch indexes. The five-year securities lost 2.4 percent in 2013, while Treasuries overall fell 3.4 percent.
Today’s five-year offering was second of three auctions of coupon-bearing debt this week. The government sold $31 billion in two-year notes yesterday at a yield of 0.392 percent. It will offer $29 billion in seven-year securities tomorrow.
The U.S. also sold $13 billion of two-year floating-rate notes to the strongest demand since the February offering of the securities as investors sought an alternative money-market security. The bid-to-cover ratio was 4.69, compared with 4.64 at the March sale. It exceeded the coverage ratio at yesterday’s sale of two-year fixed-rate notes, which was 3.52.
The high discount margin at the sale was 0.063 percent, the lowest since the first offering in January. The Treasury introduced floating-rate notes that month as the first added debt offering in 17 years. The notes are considered an alternative to Treasury bills because they’re benchmarked to a short-term security.
Investors have bid 3.07 times the $918 billion of notes and bonds sold by the Treasury so far this year. That compares with
2.87 times the $2.14 trillion sold last year and the record high of 3.15 times the $2.153 trillion sold in 2012.
Yields on European sovereign debt fell to record lows as the number of people out of work in Germany rose 23,937 to 2.91 million in May, the Federal Labor Agency said. Economists surveyed by Bloomberg forecast a decline of 15,000.
ECB President Mario Draghi said in Portugal this week policy makers need to be “particularly watchful” of low inflation. Consumer-price increases in the euro region have been less than half the central bank’s goal of just under 2 percent since October. The ECB meets June 5.
Draghi’s U.S. counterpart, Federal Reserve Chair Janet Yellen, emphasized this month the nation’s economy is falling short of the central bank’s goals and still needs help, easing concern policy makers are preparing to raise rates. The Fed has kept its target for the federal funds rate at almost zero since December 2008.
“The market is coming to the conclusion the fed funds rate will be lower for longer, and that the ECB is looking to ease even further,” said Societe Generale’s Murphy.