Bloomberg News

Treasuries Little Changed Amid Lower Demand at Five-Year Auction

June 27, 2012

Treasuries were little changed after the government’s auction of $35 billion in five-year notes attracted the lowest demand in almost a year as yields traded less than a quarter-percentage point above record lows.

The sale drew a yield of 0.752 percent, compared with the average forecast in a Bloomberg News survey of six of the Federal Reserve’s 21 primary dealers of a record auction low of 0.737 percent. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.61, the least since July 2011. A gauge of volatility fell for an eighth day before European leaders begin a summit tomorrow.

“There is so much uncertainty right now from Europe and from Washington, there isn’t a very strong flight-to-quality bid, and we are coming into the quarter-end, all of which created an atmosphere for a weak auction,” said Ward McCarthy, chief financial economist at Jefferies & Co. Inc. in New York. As a primary dealer, the firm must bid at Treasury offerings.

The yield on the current five-year note was little changed at 0.72 percent at 5:06 p.m. in New York, according to Bloomberg Bond Trader prices. It touched 0.59 percent on June 1, the lowest ever. The yield has fallen 32 basis points, or 0.32 percentage point, this quarter and lost 12 basis points this year. The 0.625 percent security maturing in May 2017 rose 1/32, or 31 cents per $1,000 face amount, to 99 18/32.

Ten-year note yields fell less than one basis point to 1.62 percent. They reached a record 1.44 percent on June 1.

Treasuries declined yesterday amid speculation whether European leaders are making progress toward resolving the euro bloc’s sovereign-debt crisis.

Indirect Bidders

At today’s auction, indirect bidders, an investor class that includes foreign central banks, bought 35.1 percent of the notes, compared with an average of 45 percent at the past 10 offerings. Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 10.7 percent, versus an average of 11.2 percent at the past 10 auctions.

The last sale of the maturity, on May 23, drew a record low auction yield of 0.748 percent.

Today’s sale was the second of three note offerings this week totaling $99 billion. The Treasury will sell $29 billion in seven-year securities on June 28. Yesterday’s offering of $35 billion in two-year debt yielded 0.313 percent.

“It’s the second weak auction in a row, and that is weighing the market some, as it suggests tomorrow’s auction won’t be very strong,” said Suvrat Prakash, an interest-rate strategist in New York at the primary dealer BNP Paribas SA. “It’s still a bond-friendly environment given the issues we have. The market understands that we won’t see much from the summit.”

Operation Twist

The Fed bought $1.98 billion of Treasuries today due from February 2036 to May 2042 as part of its effort to spur the economy by capping borrowing costs. The program is called Operation Twist.

The central bank last week extended the plan, originally set to replace $400 billion of shorter maturity Treasuries in its holdings with longer-term debt through June, by $267 billion through the end of 2012 to support economic growth. While policy makers refrained from introducing a third round of large-scale debt purchases under quantitative easing, Chairman Ben S. Bernanke indicated it remains an option.

“The Fed may have underwhelmed the market a bit with the extension of Twist,” Eric Pellicciaro, head of global rates investment at New York-based BlackRock Inc., said in an interview on “In the Loop” with Deidre Bolton. “That said, what I think the market needs to take from here is that the bar for QE is significantly higher than they initially estimated. Most likely it’s not going to happen this year.”

Volatility Drops

Volatility on options for U.S. interest-rate swaps, which are known as swaptions and used to speculate on and hedge interest-rate risk, fell to the lowest in almost six weeks.

Normalized volatility, or so-called basis-point volatility, on three-month options for U.S. 10-year swaps, known as 3m10y swaptions, touched 79.3 basis points, the lowest level since May 17. Normalized volatility signals traders’ expectations for fluctuations in swap rates over the next year by adjusting the implied volatility of the option by the interest rate struck on the swaption.

“People are fairly doubtful that will we get something substantial on the European front, and with the Fed’s extension of Twist it’s doubtful rates will shoot higher any time soon,” said Brian Edmonds, head of interest rates in New York at Cantor Fitzgerald LP, a primary dealer. “The market is going to continue to trade within a very narrow range until something changes.”

Costly Securities

A valuation measure showed the benchmark notes trading at almost the most expensive level ever. The term premium, a model created by economists at the Fed, was at negative 0.87 percent, after reaching a record negative 0.94 percent June 1 as investors sought refuge from Europe’s debt turmoil.

A negative reading indicates investors are willing to accept yields below what’s considered fair value. The average over the past decade is 0.50 percent.

“There is no clarity on Europe, and for the most part people are just keeping their powder dry to see what happens at the European summit,” Adrian Miller, a fixed-income strategist at GMP Securities LLC in New York, said in a phone interview. “Treasuries are clearly overvalued, but this condition can persist as long as the level of uncertainty does.”

Door Shut

German Chancellor Angela Merkel shut the door to joint euro-area bonds as a means of lowering Spain’s borrowing costs, saying they are the “wrong way” to achieve the greater European integration needed to stem the debt crisis.

Speaking three hours after Spanish Prime Minister Mariano Rajoy made a plea for help from tomorrow’s European summit, Merkel said that euro bonds, euro bills and debt redemption funds are unconstitutional in Germany and economically “wrong and counterproductive.”

Treasuries remained little changed earlier after durable- goods orders rose 1.1 percent in May, the first increase in three months, and more Americans than forecast signed contracts to buy previously owned homes.

Bookings for goods meant to last at least three years rose 1.1 percent rose 1.1 percent, Commerce Department data showed. The index of pending home resales climbed 5.9 percent to 101.1 last month, figures from the National Association of Realtors showed. A Bloomberg News survey projected a 1.5 percent gain.

To contact the reporters on this story: Cordell Eddings in New York at; Lindsey Rupp in New York at

To contact the editor responsible for this story: Dave Liedtka at

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