Tags: Buyers | Treasury | Auction | Fed

Buyers Snap Up Treasury Notes on Fed Rate Hopes

Tuesday, 17 December 2013 09:03 PM

The Treasury's sale of $32 billion of two-year notes Tuesday drew the strongest demand in almost a year on speculation the Federal Reserve’s efforts to hold down short-term yields will continue to support the debt.

The auction’s bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.77, the most since January, and above the average of 3.26 for the past 10 sales. The notes sold at a yield of 0.345 percent, the highest since August. Traders see an 89 percent chance the Federal Open Market Committee, which will release a policy statement Wednesday, will hold its target rate steady through 2014, according to futures data compiled by Bloomberg.

“The Fed has successfully convinced the market they are committed to keeping front-end rates lower for longer, and that continues to support the front end,” said Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York. “The market has gotten the message that the Fed funds rate will stay low for some time. Whether the Fed can calm the long end as well, we will have to see tomorrow.”

The yield on the current two-year note fell one basis point, or 0.01 percentage point, to 0.32 percent at 5 p.m. in New York, according to Bloomberg Bond Trader Prices. The yield on the 10-year note dropped four basis points to 2.84 percent.

Taper Expectations

The central bank will probably start curtailing its $85 billion in monthly bond purchases this week after unexpectedly refraining from reducing them in September, according to 34 percent of economists surveyed Dec. 6 by Bloomberg, an increase from 17 percent in a Nov. 8 survey. Twenty-six percent forecast January and 40 percent said March. The Fed buys the assets to hold down borrowing costs and fuel economic growth.

Policy makers have kept the benchmark interest-rate target for overnight loans between banks at zero to 0.25 percent since 2008. The Fed has been emphasizing that the tapering of bond purchases isn’t a tightening of monetary policy, and Chairman Ben S. Bernanke said last month the rate will probably stay low long after bond-buying ends.

Two-year notes have returned 0.3 percent this year, compared with a loss of 2.9 percent by the broad Treasuries market, according to Bank of America Merrill Lynch indexes. The two-year securities gained 0.3 percent in 2012, while Treasuries in total rose 2.2 percent.

The yield on the notes sold Tuesday compared with a 0.349 percent forecast in a Bloomberg News survey of seven of the Fed’s 21 primary dealers.

‘Strong Interest’

Indirect bidders, a class of investors that includes foreign central banks, bought 21.5 percent of the sale, the lowest amount since August. The average at the past 10 auctions was 24.6 percent.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 30.2 percent of the notes at the last sale, compared with an average of 22.4 percent at the past 10.

“Investors showed up with strong interest in the two-year auction,” George Goncalves, New York-based head of interest- rate strategy at the primary dealer Nomura Holdings Inc., wrote in a note to clients. “This may be a reflection that the market is building up higher expectations for a strengthened forward guidance in tomorrow’s FOMC release.”

The U.S. will sell $35 billion of five-year debt Wednesday, and $29 billion of seven-year securities along with $16 billion in five-year Treasury Inflation Protected Securities.

Notes ‘Boon’

The sales will raise $45.8 billion of new cash, as maturing securities held by the public total $66.2 billion, according to the U.S. Treasury.

Investors bid $2.88 for each dollar of the $2.06 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.

“There is a lot of expectation that the Fed will strengthen forward rate guidance, which continues to be a boon for two-year notes,” said Thomas Simons, a government-debt economist in New York at Jefferies LLC, a primary dealer. “The general gist is that rates will be lower for longer than the current rate guidance suggest. Even though there is a risk that tapering is announced, the front end will be insulated from that.”

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The Treasury's sale of $32 billion of two-year notes Tuesday drew the strongest demand in almost a year, on speculation the Federal Reserve will continue to hold down short-term yields.
Tuesday, 17 December 2013 09:03 PM
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