Treasury five-year notes gained for a fourth day, the longest rally since August, as a $35 billion auction of the securities received the most demand in a decade from a group of bidders that includes foreign central banks.
Indirect bidders bought 65 percent of the notes Tuesday, the most since December 2004, with U.S. yields the highest among Group of Seven nations. The securities were sold at a yield of 1.595 percent. The average five-year yield of G-7 nations Tuesday excluding the U.S. was 0.704 percent. Japan had the lowest at 0.111 percent, followed by Germany, 0.112 percent.
“The ongoing strength of the dollar and the low-global-yield landscape outside of the U.S. makes five-year Treasurys yielding over 1.50 percent attractive to foreign investors as we go into month-end,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “This is not a Federal Reserve story. It’s an issue of U.S. Treasurys looking attractive versus the global alternatives.”
Current five-year note yields fell three basis points, or 0.03 percentage point, to 1.57 percent at 4:20 p.m. New York time, according to Bloomberg Bond Trader prices. It was the lowest level since Nov. 17. The price of the 1.5 percent debt due October 2019 rose 5/32, or $1.56 per $1,000 face amount, to 99 22/32. U.S. 10-year note yields dropped five basis points to 2.26 percent, the least since Oct. 28.
Thirty-year bond yields slid below 3 percent for the first time since Oct. 23 before a report Wednesday that’s forecast to show inflation stayed below the Fed’s 2 percent target for a 30th month. The long bond, the security most sensitive to inflation, sank six basis points to 2.96 percent.
Tuesday’s auction was rated five, or outstanding, by four of the Fed’s 22 primary dealers on a scale of one to five. It was the second of the two fixed-rate note sales conducted this week to receive the rating.
Treasurys climbed even as a report showed the U.S. economy grew more than previously estimated in the third quarter. Gross domestic product rose at a 3.9 percent annualized rate, up from an initial estimate of 3.5 percent, Commerce Department figures showed today in Washington. Economists surveyed by Bloomberg called for a 3.3 percent gain. After the 4.6 percent increase in the second quarter, it marked the biggest back-to-back advance since late 2003.
The European Central Bank and the Bank of Japan are embracing monetary stimulus to spur slumping economies.
“We are the economic engine,” said Michael Franzese, senior vice president of fixed-income trading at ED&F Man Capital Markets in New York. “They are going to keep buying our debt. It’s more of an investment based on relative value than flight to quality. Overall demand is going to be strong internationally.”
Tuesday’s auction yield compared with an average forecast of 1.613 percent in a survey of 10 primary dealers. The bid-to cover ratio, which gauges demand by comparing total bids with the amount of debt offered, was 2.91, the highest since March, versus an average of 2.74 at the past 10 sales.
Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 9.9 percent of the notes, versus an average of 13.7 percent at the past 10 auctions.
An offering Monday of Treasury two-year notes yielded 0.542 percent, versus a Bloomberg survey’s forecast of 0.551 percent. The bid-to-cover ratio was 3.71, the highest since December.
The U.S. will sell $29 billion of seven-year fixed-rate securities Wednesday. The Securities Industry and Financial Markets Association recommended trading be closed on Thursday for the U.S. Thanksgiving holiday and that it shut at 2 p.m. New York time Friday.
Snow from a powerful storm is forecast to move up the East Coast Wednesday. New York City may get four to six inches, said Brian Ciemnecki, a National Weather Service meteorologist in Upton, New York.
“People are going to be eyeing the exit,” said William O’Donnell, head U.S. government-bond strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut, a primary dealer. “With a half-day and a storm brewing, I would be surprised if there were three historically good auctions in a row.”
The Treasury also sold $13 billion of two-year floating-rate notes Tuesday at a yield of 0.068 percent, the highest since July. While the bid-to-cover ratio rose to 4.00 from 3.58 at the October sale, the average at the past 10 auctions was 4.59.
The Fed has kept its benchmark interest-rate target in a range of zero to 0.25 percent since 2008 to support the economy. It will raise the rate in about 10 months, according to data compiled by Morgan Stanley, a primary dealer.
In contrast, China cut interest rates last week. The Bank of Japan in October increased the target for the amount of money it plans to pump into the economy. European Central Bank President Mario Draghi said last week policy makers must drive euro-area inflation higher quickly and will broaden their asset purchases if needed.
The Fed’s preferred gauge of inflation held at 1.4 percent last month from a year earlier, matching September’s performance, economists surveyed by Bloomberg forecast before a Commerce Department report Wednesday. The indicator, a measure of consumer expenditures, was last at 2 percent in April 2012.
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