U.S. 10-Year Auction Leaves Dealers With Most Since July

The 22 banks and investment firms that underwrite U.S. debt were left with the largest share of a Treasury 10-year note auction in almost a year as buyers from a investor class that includes foreign central banks stepped away.

The Federal Reserve’s primary dealers bought 44.5 percent of the $21 billion in benchmark notes sold yesterday in the reopening, the highest level since July. This came a day after the dealers took 54.1 percent of the securities in a three-year note auction. The 10-year debt was sold at yield of 2.648 percent, compared with a forecast of 2.633 percent in a Bloomberg News survey of seven of the primary dealers.

“We are at the higher end of the yield range, and still investors want more yield,” said Justin Lederer, an interest-rate strategist in New York at Cantor Fitzgerald LP, which as a primary dealer is obligated to bid at U.S. debt auctions. “The economy is getting better and signs of inflation will pick up eventually, and investors aren’t optimistic about locking in these low yields unless things make a turn for the worse.”

The yield on the current 10-year note was little changed at 2.64 percent at 5 p.m. yesterday in New York, according to Bloomberg Bond Trader prices. The price of the 2.5 percent notes maturing in May 2024 was 98 25/32.

Yields on the benchmark securities earlier climbed to 2.66 percent, the highest since May 12, and dropped to as low as 2.61 percent.

Treasuries returned 2.6 percent this year through June 10, according to the Bloomberg U.S. Treasury Bond Index, the best start to a year since 2011.

Bidder Participation

Indirect bidders, an investor class that includes foreign central banks, purchased 36.1 percent of the notes, compared with an average of 45.2 percent for the past 10 sales.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 19.4 percent of the notes, compared with an average of 18.9 percent at the last 10 auctions.

The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.88, compared with an average of 2.67 for the previous 10 sales.

Treasury 10-year notes have become the most coveted in almost a year in the short-term market for borrowing and lending securities amid a dearth of the debt before the auction, making them more expensive than they otherwise would be at auction, said Thomas Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp

Repo Rate

Traders have been willing to pay to borrow the notes in exchange for loaning cash overnight for the most actively traded 10-year maturity, with a repurchase agreement rate reaching negative 2.90 percent, according to data from ICAP Plc tracked by Bloomberg. Many times traders short, or sell securities they’ve borrowed in the repo market, ahead a Treasury sale to profit if prices of the securities fall after the auction.

Treasury 10-year notes are near the most expensive versus Treasury five- and 30-year debt in almost a year.

The butterfly index spread, which measures how the 10-year note is performing against the two other securities, is at 11 basis points after falling to 7.3 basis points on May 29, the lowest level since June 2013. The average this year is 19 basis points. Higher readings indicates the market is bearish on the middle security, while a drop in the figure indicates investors are more bullish.

‘Very Special’

“The securities were expensive relative to the rest of the curve and trading very special on repo, which added to the richness, a combination that made it more unattractive to hold,” said Tucci. “The whole investor community has gone bearish for the time being, and it will take true demand from something fundamental to reverse that negative psychology.”

Ten-year notes have returned 4.9 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.

The auction was the second of three offerings this week. The U.S. sold $28 billion of three-year debt June 10 at a yield of 0.93 percent and will auction $13 billion of 30-year bonds today.

The sales will raise $30 billion of new cash, as maturing securities held by the public total $32 billion, according to the U.S. Treasury.

“The market apparently wants to take a wait-and-see approach, with next week’s Federal Reserve meeting hanging over the market,” said Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York. “In the end, we’d have to say the auction ultimately was a disappointment.”

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