Treasury 5-Year Notes Attract Highest Indirect Bids Since July

The U.S. sale of $35 billion of five-year notes drew the strongest demand in 11 months from a class of investors that includes foreign central banks on bets the Federal Reserve will keep interest rates lower for longer.

Indirect bidders purchased 52.5 percent of the securities, the most since July, compared with an average of 44.8 percent for the past 10 sales, Treasury data compiled by Bloomberg show.

The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.74, versus an average of 2.68 for the past 10 sales.

The U.S. economy contracted more than forecast last quarter and demand for durable goods decreased in May, reports showed today. Fed policy makers said on June 18 that they expect their year-end rate will reach 1.13 percent in 2015 and 2.5 percent in 2016. Trading in the futures and swaps markets indicate the benchmark rate will remain below 2 percent through March 2017.

“The five-year note had been beat up of late, but the auction was decent, especially given the rally coming in today, and it underscores the Fed’s view of low rates for longer,” said Justin Lederer, an interest-rate strategist in New York at Cantor Fitzgerald LP, one of 22 primary dealers that bid at Treasury sales.

The notes drew a yield of 1.67 percent, compared with a forecast of 1.66 percent in a Bloomberg News survey of six primary dealers.

‘Decent Demand’

The yield on the current five-year note fell two basis points, or 0.02 percentage point, to 1.65 percent at 2:08 p.m. in New York, according to Bloomberg Bond Trader prices.

“It was a fair auction, decent demand,” said Guy Haselmann, an interest-rate strategist in New York at Bank of Nova Scotia, a primary dealer. “Global fixed-income continues to trade very, very well despite the fact most market pundits were calling for higher rates this year in an improving economy.”

Five-year notes have returned 1.5 percent this year, versus a gain of 2.8 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.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 9.3 percent of the notes at the sale, compared with an average of 13.1 percent for the past 10 auctions.

The government sold $30 billion in two-year notes yesterday at a yield of 0.511 percent, the highest in over three years, and will offer $29 billion in seven-year notes tomorrow.

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