Treasuries Advance After U.S. Seven-Year Note Demand Swells
February 23, 2012, 8:10 PM ESTBy Susanne Walker and Cordell Eddings
Feb. 23 (Bloomberg) -- Treasuries rose after the U.S. sale of $29 billion in seven-year notes drew stronger-than-average demand amid concern Europe’s sovereign-debt crisis hasn’t been contained.
U.S. 10-year yields reached a one-week low as the European Commission said the region’s economy will shrink this year, dragged down by Italy and Spain. Treasuries fell earlier as U.S. weekly initial jobless claims held at a four-year low. At the seven-year note sale, the bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.11, compared with an average of 2.81 for the previous 10 sales.
“It is general uncertainty about what’s next for a lot of things with what’s going on in Europe,” said George Goncalves, head of interest rate strategy at Nomura Holdings Inc., one of 21 primary dealers that trade directly with the Federal Reserve. “There are dollars all over the place that have to be put to work.”
The yield on the current seven-year note fell one basis points, or 0.01 percentage point, to 1.39 percent, at 4:59 p.m. in New York, according to Bloomberg Bond Trader Prices. The 1.25 percent securities maturing in January 2019 rose 2/32, or 63 cents per $1,000 face amount, to 99 2/32.
The yield on the benchmark 10-year note fell one basis point to 2 percent and touched 1.97 percent, the least since Feb. 16.
Auction Detail
The seven-year notes drew a yield of 1.418 percent, compared with a forecast of 1.456 percent in a Bloomberg News survey of 11 of the Federal Reserve’s primary dealers.
“It looks like a good one,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “Treasuries are what people want to own because they think it’s the safest thing out there. It’s fear of Europe falling apart.”
Indirect bidders, an investor class that includes foreign central banks, purchased 41.8 percent of the notes, compared with an average of 39.9 percent for the past 10 sales.
Direct bidders, non-primary dealer investors that place their bids directly with the Treasury, purchased 19.3 percent of the notes, the most since at least February 2009, compared with an average of 11.9 percent at the last 10 auctions. Treasury resumed sales of seven-year notes in February 2009 after suspending sales in 1993.
“People were caught off guard by the direct bid,” said Justin Lederer, an interest-rate strategist at Cantor Fitzgerald LP in New York, a primary dealer. “It’s the largest since the reintroduction.”
Repo Trades
The auction was also helped by investors in short-term markets who have been willing to pay to borrow the securities in exchange for loaning cash for the most actively traded seven- year note, which is the 1.25 percent security that matures in January 2019. Typically, lenders of cash receive interest on those loans, represented by a positive repurchase agreement, or repo, rate. Securities in highest demand have lower rates and are called “special.”
The overnight repo rate for the current seven-year note closed yesterday at negative 2.02 percent, according to data from ICAP Plc, the world’s largest inter-dealer broker. The rate closed today at 0.06 percent.
“The issue being on special helped demand on the margins as people had to pay up for it in the repo market to borrow it and that illustrated that there as a reasonable amount of demand for the security,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut.
Note Returns
Seven-year notes have lost 0.02 percent this year, after returning 14 percent in 2011, according to a Bank of America Merrill Lynch index. The overall Treasury market has fallen 0.5 percent this year after gaining 9.8 percent in 2011.
Today’s offering is the third of three auctions of U.S. notes this week totaling $99 billion. The Treasury sold $35 billion of five-year debt yesterday at a yield of 0.9 percent and $35 billion of two-year securities on Feb. 21 at 0.31 percent.
Volume in the Treasury market yesterday remained below the one-year average of $275 billion. About $255.4 billion of Treasuries changed hands through ICAP Plc, the world’s largest interdealer broker.
Bank of America Merrill Lynch’s MOVE index, which measures price swings based on options, closed yesterday at 79.6 basis points, near the lowest level since July 2007. The five-year average is 112 basis points.
Economic Data
Applications for jobless benefits were unchanged in the week ended Feb. 18 at 351,000, the fewest since March 2008, Labor Department figures showed today. The median projection in a Bloomberg News survey called for 355,000 claims, marking the fourth straight week that the figures have been better than forecast.
“The market sold off a little bit on the jobless-claims data,” said Thomas Simons, a government debt economist in New York at Jefferies Group Inc., a primary dealer. “This is the survey week for employment so it indicates we may get another strong payroll data.”
The Fed sold $8.6 billion of Treasuries maturing from April 2014 to February 2015 today, according to the New York Fed’s website. The bank is replacing shorter-maturity securities in its holdings with longer-term debt to cap borrowing costs.
Fed Bank of Dallas President Richard Fisher said additional asset purchases by the central bank are unnecessary and calls for such a move are “wishful thinking” by Wall Street.
“Our job is not to prop up the Street,” Fisher said today in an interview on CNBC. “We are working on the real economy.” Some investment professionals appear to have “wishful thinking” for more accommodation, he said.
Benchmark 10-year note yields may rise to 2.50 percent by year-end, according to the average forecast in a Bloomberg News survey of financial companies, with the most recent projections given the heaviest weightings.
--Editors: Paul Cox, Dennis Fitzgerald
To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Susanne Walker in New York at swalker33@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
