Trading volume rose yesterday to $293 billion through ICAP Plc, the world’s largest interdealer broker. The figure is above the 2012 average of $242 billion. Volume reached $439 billion on March 14, the highest since August.
A $29 billion sale of seven-year U.S. notes yesterday drew a record-low yield of 1.203 percent in the final of three auctions this week totaled $99 billion.
The Treasury sold $35 billion of five-year debt May 23 at a record low yield of 0.748 percent, and the same amount of two- year securities on May 22 at 0.3 percent.
This week’s note offerings, combined with the May 17 auction of $13 billion in 10-year Treasury Inflation Protected Securities, raised $52.9 billion of new cash, as maturing securities held by the public total $59.1 billion.
Primary dealer holdings of U.S. government debt rose to $108 billion, the highest ever, as of May 16, from a net bet against the securities of $11.9 billion in September, according to the Fed.
“The Fed is selling and it’s easier for dealers to hold these than other assets because they have low-risk weight,” Jersey of Credit Suisse said. “With the regulatory changes that have occurred, it’s the easiest way for them to meet their capital ratios.”
Banks have added Treasuries to meet revised reserve rules from the Dodd-Frank financial-overhaul law and Basel III regulations set by the Bank for International Settlements in Basel, Switzerland.
The Fed is replacing $400 billion of shorter-term debt in its holdings with longer maturities by the end of June to support the economy.
The difference between yields on 10-year notes and similar- maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, was 2.15 percentage points, close to the average of 2.15 percent during the past decade.
Investors demand 2.55 percentage points of extra yield to buy 30-year bonds instead of two-year notes. The spread narrowed to 2.48 percentage points on May 17, the least in seven months. Thirty-year bonds are more sensitive to inflation because of their longer maturity.
The 10-year yield touched a 2012 high of 2.4 percent on March 20 and a low of 1.69 percent on May 17. It will increase to 2.42 percent by year-end, according to the average forecast in a Bloomberg survey of financial companies with the most recent projections given the heaviest weightings.