The Treasury’s auctions of two-, five- and seven-year notes this week saw the highest demand in six months as the Federal Reserve maintained its bond-buying program being used to keep borrowing costs low.
Investors bid $2.88 for every dollar of the $96 billion in debt sold, the highest since similar sales of the maturities in April, according to data compiled by Bloomberg. The bid-to-cover ratio was 2.85 for all sales of U.S. coupon securities in October, the highest since May.
The Fed announced after Wednesday’s $29 billion seven-year note auction that it would press on with the $85 billion in monthly government- and mortgage-bond purchases, saying it needs to see more evidence that the economy will continue to improve. Ben S. Bernanke is pushing unprecedented accommodation into the final months of his Fed chairmanship as he seeks to shield the four-year economic expansion from the impact of higher borrowing costs and this month’s partial U.S. government shutdown.
“The theme is that the Fed remains a buyer in the market, with the concerns about the economy growing, Treasurys benefit,” said Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York. “As long as there are questions about economic growth and fiscal leadership, you will have the Fed engaged for longer than many had anticipated, which has led to the decline in yields.”
The seven-year notes were sold at a yield of 1.87 percent, the same as the forecast in a Bloomberg News survey of seven of the Fed’s primary dealers and the lowest since May. Direct bidders, non-primary dealer investors that place their bids directly with the Treasury, purchased the highest percentage on record.
Direct bidders purchased 23.9 percent of the notes, compared with an average of 19.3 percent at the last 10 auctions. The previous high was Dec. 21, 2012.
Indirect bidders, an investor class that includes foreign central banks, purchased 42.3 percent of the notes, compared with an average of 40.5 percent for the past 10 sales.
The seven-year note’s bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.66, the highest since May and compared with an average of 2.6 for the previous 10 sales. Primary dealers bought 33.8 of the securities, the lowest since Dec 2010.
“Investors have been putting money back to work since the government shutdown and debt ceiling debate ended, and that has benefited Treasurys, given the slowdown,” said Bret Barker, a managing director in U.S. fixed income at Los Angeles-based TCW Group Inc., which manages more than $128 billion. “It would be hard for the Fed to be more dovish than they are, which has put a ceiling on higher rates for now.”
The 16-day partial government closing resulted in the furloughs of as many as 800,000 federal workers and delayed release of data the Fed says it needs to evaluate the economy.
Seven-year notes have lost 2.2 percent this year, versus a drop of 1.8 percent for all Treasurys, according to Bank of America Merrill Lynch indexes. Seven-year notes returned 3.9 percent in 2012, while all Treasurys gained 2.2 percent.
The government sold $32 billion in two-year debt on Monday and $35 billion in five-year securities Tuesday at the lowest yields since May.
Investors bid $2.87 for each dollar of the $1.785 trillion in U.S. government notes and bonds sold at auction this year, according to Treasury data compiled by Bloomberg. That’s down from the record $3.15 for the $2.153 trillion sold at last year’s offerings.
The $167 billion of notes and bonds sold this month were the fewest sold by the Treasury at auction in a month since it sold $165 billion of debt in December 2010.
“The week’s auctions have gone well, and it’s just indicative of the outlook for the economy,” said Thomas Simons, a government-debt economist in New York at Jefferies LLC, which as a primary dealer is obligated to bid at Treasury auctions. “Expectations are setting their sights low for what the labor market will look like going forward and there are few other signs of economic progress in the data right now.”
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