For all the losses on Treasuries this year, demand for U.S. government debt remains stronger than before the financial crisis.
Investors bid for $5.75 trillion of notes in government auctions in 2013, or 2.87 times the amount sold, data compiled by Bloomberg show. That’s the fourth-highest ratio since the Treasury Department began releasing the data in 1993, surpassed only in the past three years as demand peaked at 3.15 times in 2012. Before the Federal Reserve began its unprecedented stimulus in 2008, the bid-to-cover ratio never topped 2.65.
While Treasuries are poised for the first drop since 2009 as the longest-term bonds suffer the world’s deepest declines, the willingness of foreign central banks, insurers and pensions to finance the largest debtor nation may temper a further jump in U.S. borrowing costs. Yields on the 10-year notes rose last week to the highest since 2011 and forecasts imply the Fed will cut its Treasury purchases by more than 50% from $540 billion this year after beginning to taper earlier this month.
“You’ve got a lot of natural buyers, you’ve got a lot of reasons why people want to be in the most liquid market in the world, even absent Fed buying,” Brian Edmonds, the New York- based head of interest-rates trading at Cantor Fitzgerald LP, said in a telephone interview on Dec. 19.
Cantor is one of 21 primary dealers, which are obligated to bid at U.S. government debt auctions.
Buoyed by the Fed’s unprecedented bond buying, record demand for Treasuries in the last four years has financed U.S. government spending and deficits that exceeded $1 trillion, enabling the world’s largest economy to recover from the worst financial crisis since the Great Depression.
Since mid-2008, the amount of marketable U.S. debt obligations has more than doubled to a record $11.8 trillion.
Yields on 10-year Treasuries, which surged more than a percentage point this year and reached a high of 3.02% last week, are still less than half the average 6.07% in the two decades before the credit crisis.
While demand for U.S. debt, ranging from two-year notes to 30-year bonds, in government auctions slipped across all maturities from last year’s record, it remained higher than in any year prior to 2008, based on the bid-to-cover ratio.
Bids for interest-bearing Treasuries outstripped the $2 trillion sold competitively this year by $3.75 trillion, data compiled by Bloomberg show. The bid-to-cover ratio was almost 20% greater than the average 2.44 times from 1997 to 2007.
The three-year note had the highest ratio of 3.35, while demand for five-year debt that protects against consumer-price gains, known as Treasury Inflation Protected Securities, was the weakest with a ratio of 2.29, the data show.
Bids for the benchmark 10-year note, used to help set interest rates on everything from car loans to mortgages, exceeded the $264 billion sold in 2013 by 2.71 times. That’s also the fourth-highest on record and eclipsed only in the past three years. Prior to the credit crisis, bids outstripped the amount of 10-year notes sold by an average 2.27 times.
“There’s always going to be those investors that need to invest in fixed income, whether it’s foreign central banks for reserve management, or if it’s pension funds and insurance companies,” Thomas Simons, a government-debt economist at Jefferies Group LLC, a primary dealer, said in a Dec. 27 telephone interview from New York. “I don’t have significant worries about people turning away from auctions just because the Fed is buying slightly fewer Treasuries.”