Brian Edmonds Comments: Treasurys Deteriorate After Lackluster 3-Year Sale
July 12, 2010, The Wall Street Journal
Treasury prices lost ground Monday after a lackluster auction of three-year Treasury notes, the government's first of three note and bond sales this week.
The $35 billion offering of three-year Treasurys, which was $1 billion less than the last three-year sale, was well bid, especially considering it was sold at the lowest yield for three-year auctions on record: The sale was more than three times subscribed. However, the yield on the new notes came in higher than that on the when-issued notes just before the auction, meaning the government had to pay up to find the notes a home.
The last time that happened was in February.
The auction was "decent, but not spectacular on the face of it," said William O'Donnell, head of U.S. government bond strategy at RBS Securities Inc. in Stamford, Conn.
After the auction, Treasurys came off their best levels of the day, with the two- and three-year Treasurys down a bit and those maturing in the next five to 30-years up just a touch. The price of the three-year note was off 1/32 to yield 1.0222%, the two-year note was down 1/32 at 0.645%, and the 10-year note was 5/32 higher at 3.037%. The 30-year Treasury was up 5/32 at 4.031%.
The new notes yielded 1.055%, the lowest yield on record for three-year sales. The notes were at 1.046% before the sale. The auction was 3.20 times oversubscribed compared to the 3.23 bid-to-cover at the last three-year auction and just above the 3.18 average bid-to-cover at the last four three-year auctions.
Indirect bidders, domestic and foreign institutions, including foreign central banks, took 41% of the notes, less than the 46.7% they took in June and less than the 50.4% four-auction average. Direct bidders, large money managers and hedge funds, as well as foreign investors, which have their own accounts with the Treasury, took 14% after taking 16.3% at the June sale and the average 13.5% they took at the last four three-year sales.
Market participants said they thought the smaller auction size would help--the $35 billion offering was down from a peak of $40 billion in April. The government has been trimming its auction sizes this year, citing better tax receipts. The market, however, failed to build in a meaningful concession ahead of the auction Monday, keeping some investors away.
"Given the market tone before the sale, people thought the auction was going to be a piece of cake," said Brian Edmonds, head of interest rates at Cantor Fitzgerald in New York. But yields were just too low for some. "It doesn't seem super-attractive to me to own three-years at these levels," he said.
The government will next sell $21 billion in previously sold 10-year Treasurys Tuesday and $13 billion in previously sold 30-years Wednesday.
Edmonds said he expects those sales to be more successful given investors preference of late for higher-yielding, longer-maturity Treasurys. The 10-year yield has risen by some 15 odd basis points from the low that it hit early July, and should see the most demand, Edmonds said.
A 10-year yield of 3.10% to 3.15% and 30-year yield of 4.10% to 4.15% would attract even more demand, Edmonds said, but given ongoing economic uncertainties, even current yields should draw buyers in.
Treasurys have remained in high favor this spring and summer amid concerns about fiscally strapped euro-zone nations and as U.S. data have been weaker than expected, suggesting the economic recovery, in the U.S. and abroad, could be slower than many had expected.
