George Goncalves Comments: Treasurys Rally Into 5-Year Note Auction - Market Watch
Market Watch, October 28, 2009
Treasury prices extended the previous session's strong gains on Wednesday, pushing yields down, as investors hope that a record government sale of 5-year notes garners the kind of strong demand seen during two previous auctions this week. A report showing weakness in new home sales also revived concerns that the housing market will continue to hinder a robust economic recovery, weighing on equities and boosting demand for the relative safety of Treasurys. Bond prices move inversely to their yields. A basis point is one one-hundredth of a percentage point. Looming large for the bond market, the Treasury Department will sell $41 billion in 5-year notes with bids due at 1 p.m. Eastern.
"There is no problem getting these auctions done given the configuration of demand out there," said Robert Tipp, chief investment strategist at Prudential Fixed Income Management, which oversees more than $200 billion of bonds.
Central banks have trade surpluses to invest, and have few highly liquid, high-quality places to put money. At the same time, investors of all stripes have been moving money out of near-zero yielding money-market funds and into fixed-income assets, he said.
Also, commercial banks are deploying excess reserves into Treasurys due to a dearth of demand for loans from consumers and businesses they want to lend to, Tipp said.
"The bond market is set up for a stable to bullish period for the next several months," Tipp said.
At Tuesday's sale of a record amount of 2-year notes, about 70% of the amount sold went to indirect and direct bidders, groups of investors that include foreign central banks and firms buying for their own accounts. The more the auction goes to direct and indirect bidders instead of primary dealers, the better off for the market. That's because dealers often have to turn around and sell the debt, putting pressure on prices.
"The fact that dealers were largely left out of the 2-year might give strength to today's auction," said Bill O'Donnell, head of Treasury strategy at RBS Securities. "But we caution that the strength of carryovers between 2- and 5-year auctions hasn't been as strong as one might suspect."
The biggest surprise Tuesday was the amount bought by direct bidders: The group took 26% of the auction, compared to less than 5% at most of the auctions in the last two years. The "directs" group has also been taking a more notable proportion of auctions of other maturities in recent months.
"Whenever directs show up in size, it usually happens in subsequent auctions too," George Goncalves, chief fixed-income-rates strategist at Cantor Fitzgerald, wrote in emailed comments. "After such a monster direct bid, non-direct folks will probably bid to win to be on the safe side."
