Brian Edmonds Comments: Treasury Prices Tick Up After 7-Year Sale At Record-Low Yield
August 27, 2010, The Wall Street Journal
Treasurys maturing in the next five to 30 years rose Thursday after the government sold seven-year notes for a record-low 1.989% yield, a sign of the ongoing strong demand for low-risk debt given the fragile U.S. economy.
The $29 billion seven-year sale wrapped up another successful week of debt sales for the U.S. Treasury Department, totaling $102 billion. The government also sold its two- and five-year notes for record-low yields earlier this week, good news as it means the government is borrowing at historically low interest rates to fund a budget deficit well over $1 trillion.
Investors have poured into Treasurys over the last several weeks, taking the two-year Treasury yield down to a record low of 0.45%, amid disappointing data ranging from the housing market to the manufacturing sector. The weak reports have further fueled fears that the U.S. economy could lose steam in the second half of the year, and turn downward once again.
"There hasn't been much good news on the economic front and people are concerned," said Brian Edmonds, head of interest rates at Cantor Fitzgerald & Co. in New York. "On any back up (in Treasury prices) there's demand."
After the seven-year auction, the seven-year note was up 2/32 to yield 1.966%, the 10-year was up 4/32 to yield 2.523%. Earlier this week, the 10-year fell as low as 2.418%, it lowest level since January 2009. The two-year was flat to yield 0.528% and the 30-year was 11/32 higher to yield 3.553%.
Many market participants believe the 10-year yield could fall to 2%, or even a bit lower, if the economy deteriorates further and the Federal Reserve steps in with more aid. The 10-year yield hit a record low of 2.047% in late December of 2008.
At Thursday's seven-year sale, the total amount of bids was 2.98 times the amount on offer, more than the 2.78 times at the July auction and also above the average of 2.87 for the previous four auctions. The indirect bid--a proxy of buying from foreign investors including central banks, was 57%, compared to 42.3% in July and the average of 51.0% for the previous four auctions.
The direct bid, a category of bids from non-primary dealers, banks, money managers and depository institutions who have direct accounts to submit bids to the Treasury auctions, was 9.0%, spot on what it was in July and a bit below the average of 10.6% for the past four auctions.
"Another solid auction," said John Briggs, an interest-rate strategist in Stamford, Conn., at RBS Securities Inc.
The size of the sale was unchanged from July.
Earlier Thursday, data showed that initial unemployment claims dropped by more than expected, 31,000 to 473,000 in the week ended Aug. 21, versus expectations of just a 10,000 drop. Still though, claims remain at an elevated level, too high to signal any strong improvement in the jobs market. The four-week moving average, which aims to smooth volatility in the data, rose by 3,250 to 486,750. That's the highest level since Nov. 28.
With the Treasury auctions now out of the way, market participants are eager to hear from Fed Chairman Ben Bernanke Friday, when he kicks off the world's top central bankers annual meeting in Jackson Hole, Wyo. Given softer data, investors are keen to see whether Bernanke will allude to the possibility of future bond purchases to help the economy.
At its last meeting on Aug. 10, the Fed decided to reinvest some $350 billion in proceeds of expiring mortgage-backed securities into U.S. Treasurys to counter a weaker than expected recovery. Some believe though that the Fed may need to re-launch its bond buying program if economic conditions worsen.
Last year, the Fed launched a program to buy about $300 billion Treasurys in an effort to lower consumer borrowing rates. While yields rose during the program, analysts said they would have been much higher without the buying.
