Tags: Treasurys | Recovery | Iraq | Bond | Demand

Treasurys Rally as Uneven Recovery, Iraq Fuel Bond Demand

Thursday, 12 June 2014 05:43 PM

Treasurys rallied for a second day Thursday as signs the U.S. economic recovery remains uneven and tension in Iraq bolstered demand at the government’s 30-year bond auction to the highest level in more than a year.

Yields on the so-called long bond dropped the most in two weeks after indirect bidders, a class of investors that includes foreign central banks, bought the largest percentage of the debt in more than eight years at the auction. Along with direct bids, that left the 22 primary dealers that participate in Treasury auctions with the smallest percentage of the sale on record.

“Growth is coming in a bit below expectations.  Q2 will be less buoyant than people thought, so that’s highly constructive for investments,” said Christopher Sullivan, who oversees $2.3 billion as chief investment officer at United Nations Federal Credit Union in New York. “The 30-year offers a substantial yield in comparison to other developed countries. There’s pretty extraordinary demand.”

The yield on the 30-year bond fell six basis points, or 0.06 percentage point, to 3.41 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. It’s the biggest drop since May 28. The price of the 3.375 percent security due May 2044, rose 1 1/32 or $10.31 per $1,000 face amount to 99 11/32.

Benchmark 10-year note yields declined four basis points to 2.6 percent.

Thirty-year bonds tumbled 2.8 percent this month through Wednesday, after surging 14 percent from January through May, according to Bank of America Merrill Lynch indexes. The five- month advance this year was the longest since 2007. The yield fell as low as 3.26 percent on May 29 and traded as high as 3.49 percent Wednesday.

Foreign Buyers

“The back end was a bit cheap, and people were looking to buy,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc.

The 30-year bond auction drew a yield of 3.444 percent, compared with a forecast of 3.463 percent in a Bloomberg News survey of seven primary dealers.

The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.69, the most since February 2013, compared with an average of 2.35 for the previous 10 sales.

Indirect bidders bought 51.8 percent of the bonds, the most since February 2006. That compared with 40.4 percent at last month’s auction and a 10-sale average of 41.3 percent.

‘Total Chaos’ in Iraq

Direct bidders, non-primary-dealer investors that place bids directly with the Treasury, purchased 21.8 percent of the offering compared with 8.4 percent last month, the lowest level since March 2013 at the monthly offerings, and the 10-auction average of 16.1 percent.

Primary dealers were left with 26.5 percent of the offering, the smallest share since the Treasury began releasing bidder participation data in 2003. The bond was revived in 2006 after being scuttled in 2001.

“Seeing the market sell off 25 basis points is enough of a reason to be buying,” Thomas di Galoma, head of fixed-income rates at ED&F Man Capital Markets in New York, said before the auction. “We’re starting to look at the geopolitical landscape again, and Iraq seems to be in total chaos.”

President Barack Obama said he won’t rule out using airstrikes to assist Iraq’s government beat back Islamic militants who’ve seized major cities and threaten to ignite a sectarian civil war.

Iraq “clearly is an emergency situation” and the government there needs more help, Obama said following a meeting with Australian Prime Minister Tony Abbott at the White House.

Retail Sales

Treasurys were supported as the 0.3 percent increase in consumer purchases last month followed a revised 0.5 percent gain in April that was much larger than previously estimated, Commerce Department figures showed Thursday in Washington. The median forecast of 83 economists surveyed by Bloomberg called for a 0.6 percent advance.

Jobless claims climbed by 4,000 in the week ended June 7, a Labor Department report showed. The median forecast of 52 economists surveyed by Bloomberg called for 310,000. Claims have averaged around 324,000 so far in 2014.

The recovery “is still not very convincing; we started the year with such optimism,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee. “The data were more disappointing than the market could reflect right away, because of the auction.”

Strong Demand

Thursday’s auction was the final of three note and bond offerings this week. The U.S. sold $28 billion of three-year debt on Tuesday at a yield of 0.930 percent, the highest since May 2011, and auctioned $21 billion of 10-year debt Wednesday at a yield of 2.648 percent.

Demand for the three-, 10- and 30-year Treasury auctions was the strongest for this series of maturities since March 2013. Investors bid 3.08 times the $62 billion of securities sold this week, the most since March 2013 when they bid 3.20 times the $66 billion sold that month.

Investors have bid 3.06 times the $1.009 trillion in notes and bonds sold by the Treasury so far this year. That compares with 2.87 times last year and a record 3.15 times in 2012.


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Treasurys rallied for a second day Thursday as signs the U.S. economic recovery remains uneven and tension in Iraq bolstered demand at the government's 30-year bond auction to the highest level in more than a year.
Treasurys, Recovery, Iraq, Bond, Demand
Thursday, 12 June 2014 05:43 PM
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