BLBG: Treasury 5-Year Note Yields Highest Since August Before Auction
By Cordell Eddings and Anchalee Worrachate
Dec. 29 (Bloomberg) -- Treasury five-year note yields traded at the highest levels in more than four months before the U.S. sells a record-tying $42 billion of the securities, the second of three note sales this week totaling $118 billion.
The five-year offering follows a $44 billion sale of two- year notes yesterday that drew the weakest demand in four months. The auctions conclude with a $32 billion seven-year sale tomorrow. Treasuries of all maturities have fallen 3.7 percent this year, according to Bank of America Merrill Lynch indexes. That would be the worst annual performance since at least 1978, when Merrill began collecting the data.
“We are seeing some cheapening before the five-year auction,” said Martin Mitchell, head government bond trader at the Baltimore unit of Stifel Nicolaus & Co., a St. Louis-based brokerage firm. “The cheapening of yields will drive demand for the most part. Quite a few people expect that yields are going to move higher, but the bottom line is Treasuries are the only game in town for debt issuance right now. Bond buyers have only one place to go.”
The five-year note yield rose one basis point, or 0.01 percentage point, to 2.61 percent at 9:02 a.m. in New York, according to BGCantor Market Data. It touched 2.63 percent, the highest level since Aug. 13. The 2.125 percent security due November 2014 fell 1/32, or 31 cents per $1,000 face amount, to 97 25/32. The five-year security to be sold today yielded 2.66 percent in pre-auction trading.
The last sale of five-year notes in November drew a high yield of 2.175 percent, the lowest since May, and attracted bids for 2.81 times the amount on offer, the largest bid-to-cover ratio for the securities since September 2007, at the start of the financial crisis.
Yield Curve
The gap between 2-year and 10-year yields narrowed to 2.77 percentage points, from 2.80 percentage points yesterday.
That spread, known as the yield curve, widened to a record 2.88 percentage points on Dec. 22 amid concern President Barack Obama’s attempt to revive economic growth with record spending will keep the deficit at $1 trillion and damp demand at auctions of government debt. U.S. marketable debt increased to a record $7.17 trillion in November from $5.80 trillion at the end of last year.
The two-year notes sold yesterday drew a yield of 1.089 percent, compared with the forecast of 1.059 in a Bloomberg survey. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.91, the lowest since August. Last month’s sale drew a record-low yield of 0.802 percent and a bid-to-cover ratio of 3.16.
Indirect bidders, an investor class that includes foreign central banks, purchased 34.8 percent of two-year notes at yesterday’s sale, the lowest amount since July, and below the 45 percent average for the past 10 auctions.
‘Aren’t Enough’
“We’re not structurally set up to absorb this much volume on a week like this,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee. “There aren’t enough bargain hunters around to tidy things up when they get sloppy.”
The 10-year breakeven rate, a gauge of market inflation expectations derived from a yield gap between regular and index- linked bonds, rose 1 basis point to 2.40 percentage points. It was at 2.12 percentage points at the end of November.
Demand for U.S. debt may also wane before reports today that economists say will show declines in U.S. home prices eased in October and consumer confidence climbed this month.
Property, Confidence
An index of home prices in 20 U.S. cities rose in October for a fifth consecutive month. The S&P/Case-Shiller home-price index increased 0.4 percent from the prior month on a seasonally adjusted basis, after a 0.2 percent rise in September, the group said today in New York. The gauge was down 7.3 percent from October 2008, the smallest year-over-year decline since October 2007.
The New York-based Conference Board’s consumer confidence index rose to 53 this month from 49.5 in November, according to a separate survey. The measure reached a record low 25.3 in February.
The Fed proposed yesterday a program to sell term deposits to banks to help mop up some of the $1 trillion in excess reserves in the U.S. banking system. The proposal, subject to a 30-day comment period, “has no implications for monetary policy decisions in the near term,” the central bank said in a statement released in Washington.
“My view on the economy is more pessimistic than that of the market,” said Luca Jellinek, a senior interest-rate strategist in London at ANZ Banking Group Ltd. “If that view is correct, Treasury yields should remain surprisingly low into next year. But in the very near-term, I will be bearish bonds because the market is not ready for that view yet.”
Holders of U.S. debt have made a return of 81 percent over the past decade, according to the Bank of America Merrill Lynch indexes.
To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Anchalee Worrachate in London at aworrachate@bloomberg.net.
