December 20, 2013, Bloomberg
Treasury’s $29 billion seven-year note auction, the final government coupon sale of 2013, drew the highest yield in more than two years as the Federal Reserve plans to wrap up its bond-buying by the end of next year.
The notes drew a yield of 2.385 percent, the most since June 2011, exceeding a forecast of 2.374 percent in a Bloomberg News survey of seven of the Fed’s 21 primary dealers who are required to bid at the auctions. The bid-to-cover ratio, which gauges demand by comparing total bids at yesterday’s auction with the amount of securities offered, was 2.45, trailing the average of 2.57 for the previous 10 sales.
The auction completed four note sales this week totaling $112 billion after the Fed said Dec. 18 it will reduce monthly asset buying to $75 billion in January, from $85 billion this month.
“After the Fed’s announcement, the general bias for yields is higher,” said Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York. “Without Fed buying in the long end, there is some aversion to holding debt there. The question also remains, can the Fed execute an unwind of tapering without disrupting the market? And the jury is still out on that.”
Indirect bidders at the seven-year auction, a class of investors that includes foreign central banks, purchased 41.7 percent of the notes, versus an average of 40.3 percent at the past 10 sales.
Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 17.1 percent, compared with the 19.1 percent average at the past 10 auctions.
The central bank left unchanged its statement that it will probably hold its target interest rate near zero “at least as long as” unemployment exceeds 6.5 percent, so long as the outlook for inflation is no higher than 2.5 percent.
“The cat is out of the bag with the Fed news, and that has left the greater risk of higher yields on the long end, even as the short end is supported,” said David Ader, head of U.S. government-bond strategy at CRT Capital Group LLC in Stamford, Connecticut. “The tapering process is underway, and if data continue to get better, the acceleration in tapering will continue, which argues for a more bearish outlook.”
Policy makers have maintained the benchmark rate, the target for overnight loans between banks, at zero to 0.25 percent since 2008 to support the economy. A majority of FOMC participants — 12 out of 17 — in economic projections saw the first increase in the rate in 2015.
Fed Chairman Ben S. Bernanke said if job gains continue and inflation increases, “I imagine we’ll continue to do, probably at each meeting, a measured reduction” in purchases.
Seven-year notes have lost 3.8 percent this year, versus a drop of 2.9 percent for Treasuries overall, according to Bank of America Merrill Lynch indexes. The seven-year securities returned 3.9 percent in 2012, while Treasuries overall gained 2.2 percent.
The government sold $32 billion in two-year debt on Dec. 17 at a yield of 0.345 percent, $35 billion in five-year securities on Dec. 18 at a yield of 1.6 percent and $16 billion in five-year inflation-linked notes yesterday at a yield of negative 0.375 percent. Holders of TIPS receive an adjustment to the principal value of their securities equal to the change in the consumer price index, in addition to a fixed rate of interest that’s smaller than the interest paid to a holder of conventional debt.
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.
“The market is a bit fatigued by all the supply it’s had to take down in a week where you also had to deal with the uncertainty of the Fed and the ensuing taper,” said Justin Lederer, an interest-rate strategist at Cantor Fitzgerald LP in New York, a primary dealer.
Investors bid $2.87 for each dollar of the $2.14 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.