Treasury 10-year note yields traded close to the highest level since April after the U.S.’s first auction of the securities this year was met with weaker-than-average demand.
The benchmark yield pared an earlier decline after the $21 billion in notes drew a yield of 1.863%, compared with a forecast of 1.849% in a Bloomberg News survey of eight of the Federal Reserve’s primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.83, compared with an average of 3 for the previous 10 sales.
“It came a little weaker than people anticipated -- there was a pretty decent short-covering bid going into it,” said Thomas di Galoma, a managing director at Navigate Advisors LLC, a brokerage for institutional investors in Stamford, Connecticut. The recent run-up in Treasury prices, he said, “may have abated some of the enthusiasm for the auction.”
The yield on the current 10-year note declined 0.1%, or 0.01 percentage point, to 1.86% at 2:11 p.m. in New York, according to Bloomberg Bond Trader prices. It earlier rose and fell as much as two basis points. The 1.625% security maturing in November 2022 rose 3/32, or 94 cents per $1,000 face value, to 97 29/32.
The yield last week jumped 20 basis points, touching 1.97% on Jan. 4, the highest since April 26, after U.S. lawmakers reached a budget deal to avoid the so-called fiscal cliff and the Fed in December announced plans to increase its monthly purchases of government and mortgage debt. It has fallen 11 basis points since Jan. 4.
Momentum ‘Slowed’
“The selloff in rates has been pretty severe, but the momentum for higher rates has slowed for now,” Aaron Kohli, an interest-rate strategist in New York with BNP Paribas SA, a primary dealer, said before the auction. “The unresolved debt- ceiling debate will keep a bid in the market, and the bias is for lower yields.”
Indirect bidders, an investor class that includes foreign central banks, purchased 28.5% of the notes today, compared with an average of 38.1% for the past 10 sales.
Direct bidders, or institutional investors outside of the 21 primary dealers required to bid at U.S. debt auctions, bought 14.8% of the notes after purchasing 42.7% at the December auction, the second highest on record after 45.4% at the July sale.
‘Sloppy Auction’
Demand from the group of investors that includes pension funds and insurance companies fell to 5.2% in August, after the record demand seen in July, echoing this sale’s weak demand after last month’s near record.
Yesterday’s three-year note auction saw direct bidders purchase a record amount for the second straight sale.
“It was a sloppy auction, and most of that was because of the absence of direct bidders,” said George Goncalves, head of interest-rate strategy at Nomura Holdings Inc., a primary dealer. “Investors were gun shy heading into the auction because of how aggressive and unpredictable the direct bid has been of late.”
Ten-year U.S. debt has lost 1.1% this year, according to a Bank of America Merrill Lynch indexes, compared with a 0.6% loss in the broader Treasury market. The notes returned 4.2% in 2012, compared with a 2.2% gain by Treasuries overall.
Yield Curve
The difference between the yields on two-year notes and 10- year securities, the so-called yield curve, narrowed to 1.62 percentage points, down from 1.69 percentage points on Jan. 4, the widest since May.
The so-called yield curve typically narrows when investors anticipate a slow economic recovery because they demand less compensation for the risk of inflation.
The government is selling $66 billion of notes and bonds this week. It sold $32 billion of three-year securities yesterday and is due to auction $13 billion of 30-year debt tomorrow.
The sales this week will raise $24.4 billion of new cash, as maturing securities held by the public total $41.6 billion, according to the Treasury.
