Treasury 5-Year Note Auction Bidders Hit With Losses After Fed

Winning bidders at the Treasury’s auction of $35 billion in five-year notes were looking at losses an hour later after the Federal Reserve said it sees further improvement in the labor market.

Yields on the securities climbed as high as 1.625 percent in what’s known as when-issued trading following yesterday’s release of the Fed’s policy statement at the conclusion of a two-day meeting at 2 p.m. in Washington. The notes were sold at a yield of 1.567 percent, compared with an average forecast of 1.555 percent in a survey of seven of the central bank’s 22 primary dealers, which are obligated to bid at the auction.

“We are underwater in the fives,” said Brian Edmonds, the head of interest-rates trading at primary dealer Cantor Fitzgerald LP in New York. “It was a more hawkish FOMC statement, certainly leaving the door open to a Fed tightening as early as mid-2015.”

Demand for the notes was already the lowest in five years with bidders hesitant to purchase the debt at auction before the release of the Fed statement. The bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 2.36, the least since July 2009.

The Federal Open Market Committee said it sees further improvement in the labor market as it ended an asset-purchase program that has added $1.66 trillion to its balance sheet. While saying inflation in the near term will probably be held down by lower energy prices, they repeated language from their September statement that “the likelihood of inflation running persistently below 2 percent has diminished somewhat.”

Bidding Metrics

The Treasury’s debt sale was rated a ‘2’ by five primary dealers. The characterization is based on a scale of one through five, with one being a failed auction and five judging the results as outstanding. Two would denote a poor auction, three an average sale and four would indicate a good offering, according to a survey of the banks and brokerage firms.

“There was a little bit too much going on,” said David Robin, managing director and interest-rate strategist in New York at Newedge USA LLC. “People bid defensively.”

Indirect bidders, a class of investors that includes foreign central banks, bought 47.8 percent of the notes compared to 50.3 percent at the September sale and the average of 47.1 percent at the past 10 offerings.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, were awarded 10.5 percent, compared to 8.8 percent at the last sale and an average of 14 percent at the past 10 sales.

Five-year notes have returned 3.2 percent this year, versus a gain of 5.1 percent by the broad Treasuries market, according to Bank of America Merrill Lynch indexes.

The central bank has held its short-term interest-rate target at zero to 0.25 percent since December 2008.

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