Treasuries fell for a fifth day after an auction of $34 billion in five-year notes drew a higher-than-forecast yield, spurring concern record sales of U.S. debt are overwhelming demand.
The security drew a yield of 1.849 percent, higher than the 1.801 percent forecast in a Bloomberg News survey of eight trading firms. The U.K. failed to attract enough bidders today at an auction of 1.75 billion pounds ($2.55 billion) of gilts for the first time in almost seven years.
“This caught a lot of people unaware,” said Bulent Baygun, head of interest-rate strategy in New York at BNP Paribas Securities Corp., one of the 16 primary dealers that are required to bid at Treasury auctions. “Prior to the auction the Fed conducted its purchases of Treasuries, which may have compressed interest rates below where they would have been otherwise.”
The 10-year note yield rose seven basis points, or 0.07 percentage point, to 2.78 percent at 1:30 p.m. in New York, according to BGCantor Market Data. The price of the 2.75 percent security due in February 2019 fell 19/32, or $5.94 per $1,000 face amount, to 99 25/32.
The 30-year bond yield gained nine basis points to 3.68 percent, while the current five-year note yield appreciated eight basis points to 1.81 percent.
The bid/cover ratio, which gauges demand by comparing the number of bids to the amount of securities sold, fell to 2.02 from 2.21 at the last 5-year note sale, indicating weaker demand.
The Treasury Department is scheduled to sell $24 billion of seven-year securities tomorrow. It sold $40 billion of two-year notes yesterday.
President Barack Obama’s government is selling record amounts of debt to spur economic growth, service deficits, and cushion the failures in the financial system. Debt sales will almost triple this year to a record $2.5 trillion, according to estimates from Goldman Sachs Group Inc.
The Fed purchased $7.5 billion of U.S. debt spread among 13 of the possible 19 securities eligible for purchase, it said. The notes mature from February 2016 to February 2019, the Federal Reserve Bank of New York said in a statement today. Nearly $22 billion was submitted to the central bank in the first day of buying, the New York Fed said. The central bank plans to buy up to $300 billion of U.S. government debt over the next six months.
The Fed joins central banks in the U.K. and Japan in extraordinary purchases of government debt, broadening efforts to unfreeze credit and end the recession after cutting the benchmark interest rate close to zero. Policy makers announced the decision to buy the debt last week along with a plan to more than double purchases of housing debt to $1.45 trillion, hoping to reduce rates on home loans.
“If Fed officials want to really drive mortgage rates lower, they will focus on maturities on either side of the seven-year note, basically the five- to 10-year area,” said Ward McCarthy, a principal at Stone & McCarthy Research Associates in Skillman, New Jersey, and former Fed economist, before the results were reported.
The central bank said yesterday it will buy notes due from March 2011 to April 2012 on March 27. On March 30, it will purchase securities due from August 2026 through February 2039, and on April 1, the Fed will buy Treasuries due from May 2012 through August 2013. The following day it will purchase notes due from September 2013 through February 2016.
The U.K.’s effort to buy government debt wasn’t enough to prevent today’s failed auction of 40-year gilts, the first time that the government failed to attract enough bids at a sale of nominal debt since 1995. Investors bid for 1.63 billion pounds ($2.4 billion) of 4.25 percent notes, less than the 1.75 billion pounds offered.
Treasuries lost 1.68 percent this year, according to Merrill Lynch & Co.’s Treasury Master Index. U.S. debt was down 3.4 percent before the Fed announced its purchase program last week.
Average 30-year fixed mortgage rates were about 2.29 percentage points more than 10-year Treasury yields, versus 1.57 percentage points five years ago. Mortgage rates declined to 4.98 percent in the week ended March 19, according to Freddie Mac, the mortgage-finance company under U.S. government control.
The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, widened to 1.02 percentage point from 91 basis points on Feb. 10. It reached a two-month high of 1.13 percentage point on March 13. The spread averaged 36 basis points in 2006 before credit markets began to decline the next year. Bloomberg