Bloomberg News

U.S. 7-Year Notes Fall Before $29 Billion Auctions

October 24, 2012

Treasury seven-year notes fell as the Federal Reserve said it would maintain stimulus measures with the economy growing modestly and investors prepared for the sale of $29 billion of the securities tomorrow.

Thirty-year bonds declined as the central bank, in its last meeting before the Nov. 6 presidential election, retained its program of $40 billion in monthly purchases of mortgage-backed debt aimed at spurring the three-year expansion and said “inflation recently picked up somewhat.” The Treasury’s sale of $35 billion of five-year notes prior to the Fed’s announcement was met with lower-than-average demand.

“The market is a bit weaker as the setup is starting for tomorrow’s auction,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors. “Between the Fed’s stance, slowing global growth, Europe and fiscal cliff the Treasury market is being underpinned. No one wants to stick their neck out.”

The current seven-year note yield rose two basis points, or 0.02 percentage point, to 1.21 percent as 4:58 p.m. in New York according Bloomberg Bond Trader data. The 1 percent securities maturing in September 2019 fell 1/8, or $1.25 per $1,000 face amount, to 98 19/32. Thirty-year bond yields rose five basis points to 2.95 percent.

Note Sale

The yield on the existing five-year note was little changed at 0.76 percent. The five-year notes sold today drew a yield of 0.774 percent, compared with a forecast of 0.775 percent in a Bloomberg News survey of seven of the Federal Reserve’s primary dealers.

The bid-to-cover ratio, which gauges demand by comparing total bids with the amount offered, was 2.73, compared with an average of 2.92 for the previous 10 sales. Direct bidders, non- primary dealer investors including pension funds and insurance companies that place their bids directly with the Treasury, purchased 15.5 percent of the notes, the most since November 2010 and compared with an average of 10.2 percent at the last 10 auctions.

Indirect bidders, an investor class that includes foreign central banks, purchased 42.3 percent of the notes, compared with an average of 42.7 percent for the past 10 sales.

Today’s offering is the second of three this week totaling $99 billion. The government will sell $29 billion in seven-year securities tomorrow. Yesterday’s auction of $35 billion in two- year notes yielded 0.295 percent.

Economic Outlook

“We are in the same slow-growth economy that we’ve been in since the recovery began, and thus, the medicine that the Fed prescribed still continues to apply,” said Jay Mueller, who manages about $2 billion of bonds at Wells Capital Management in Milwaukee. “Yields should continue to stay low.”

The Fed has sought to drive down unemployment by keeping its target rate for overnight loans between banks between zero and 0.25 percent since December 2008 and purchasing $2.3 trillion of securities in two rounds of a monetary policy known as quantitative easing.

Frustrated by the slow pace of the recovery, the central bank announced Sept. 13 that it would likely keep rates at a record low and also said it would inject more money into the economy by purchasing $40 billion of mortgage bonds per month in a third round of QE.

“The statement was bullish for bonds as the Fed retains the easing bias that the Fed has had, and that and sets a high bar for the economy to have to hurdle for the Fed to reduce their accommodation,” said Carl Lantz, head of interest-rate strategy in New York at Credit Suisse Group AG, one of 21 primary dealers that trade with the Fed. “The market is waiting for the election. We could see a pickup in volatility, but there won’t be a lot of conviction until we know what the outcome will be.”

Dealer Foercasts

All the primary dealers expect its latest quantitative- easing measures to be expanded to include government securities when its current program of buying U.S. debt expires at year- end, according to a survey last week by Bloomberg News.

Treasuries fell earlier after figures from the Commerce Department showed new home sales climbed 5.7 percent to a 389,000 annual pace, the most since April 2010, following a revised 368,000 rate in August. The median estimate of 75 economists surveyed by Bloomberg called for sales to rise to 385,000.

“The stronger U.S. data that we have seen means there’s no need to add extra stimulus,” Craig Collins, managing director of rates trading at Bank of Montreal in London, said before the Fed’s decision.

The difference between yields on 10-year notes and same- maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt, was 2.48 percentage points. The average over the past decade is 2.17 percentage points.

Treasuries have lost 0.6 percent in October, on track for their worst monthly performance since March, according to Bank of America Merrill Lynch index data.

To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; John Detrixhe in New York at jdetrixhe1@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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