Treasury auctions of $66 billion of three-, 10- and 30-year debt this week drew lower-than-average demand for a third consecutive month amid speculation the Federal Reserve may slow its asset purchases.
Yesterday’s sale of $13 billion in 30-year bonds attracted the fewest bids since March. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of debt offered, was 2.47, versus an average of 2.58 at the past 10 sales. Primary dealers bought 51.3 percent of the sale, the most since March, versus an average of 49.5 percent at the past 10. The bonds yielded 3.355 percent, the highest since March 2012.
“It’s very likely that we’ll see higher interest rates from here,” said William Larkin, a fixed-income portfolio manager who helps oversee $500 million at Cabot Money Management Inc., Salem, Massachusetts. “The Fed is trying to normalize us to the change. They are slowly going to say things are better, but not where they want it to be. They’re going to slowly step up over time.”
The current 30-year bond yield fell five basis points, or 0.05 percentage point, to 3.32 percent yesterday in New York, according to Bloomberg Bond Trader data. It slid as much as eight basis points. The yield touched 3.43 percent on June 11, the highest since April 4, 2012, climbing from a 2013 low of 2.81 percent on May 1.
Ten-year note yields dropped eight basis points to 2.15 percent. They touched 2.29 percent on June 11, also the highest since April 2012. The benchmark yield has increased from this year’s low of 1.61 percent on May 1.
At the 30-year bond auction, indirect bidders, an investor class that includes foreign central banks, purchased 40.2 percent of the securities, compared with an average of 36.7 percent at the past 10 sales.
Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 8.5 percent, versus an average of 13.8 percent at the past 10 auctions.
The government’s sale on June 12 of $21 billion in 10-year notes had a bid-to-cover ratio of 2.53, the least since the 2.49 ratio at the August offering.
At the auction of $32 billion in Treasury three-year notes on June 11, the bid-to-cover ratio was 2.95, the least since December 2010.
The Treasury’s sales of $72 billion of three-, 10- and 30-year securities in May and of $66 billion of the same maturities in April also drew lower-than-average coverage ratios.
Yields have climbed since May as investors speculate whether the economy is strengthening enough for Fed Chairman Ben S. Bernanke to consider tapering bond purchases that have been used to keep borrowing rates low. The central bank’s policy-setting Federal Open Market Committee meets June 18-19.
The Fed is buying $85 billion of Treasuries and mortgage-backed securities each month to put downward pressure on borrowing costs and spur economic growth. It will slow the purchases to $65 billion a month at its October meeting, economists in a Bloomberg survey forecast last week.
Demand for Treasuries at auction has slackened this year amid signs of improvement with the U.S. economy and speculation on the direction of monetary policy. Investors have bid $2.96 for each dollar of debt sold at the U.S. government’s $971 billion in Treasury notes and bonds sold at auction, compared with a record bid-to-cover ratio of $3.15 set in 2012, according to Treasury data compiled by Bloomberg.
Thirty-year bonds have lost 7 percent this year, compared with a 1.6 percent drop in the broader U.S. Treasuries market, according to Bank of America Merrill Lynch indexes. Long bonds returned 2.5 percent in 2012, versus a 2.2 percent gain by Treasuries overall.
Ten-year notes have dropped 2.8 percent in 2013, and three-year notes have slipped 0.3 percent, Merrill Lynch indexes show.
To contact the reporters on this story: Susanne Walker in New York at firstname.lastname@example.org; Daniel Kruger in New York at email@example.com
To contact the editor responsible for this story: Dave Liedtka at firstname.lastname@example.org