Treasuries Fall as Five-Year Notes Draw Higher Yield at Auction

 Treasuries fell as the government’s record $40 billion sale of five-year notes drew weaker-than- forecast demand before the conclusion of the Federal Reserve’s two-day policy meeting.

The notes drew a yield of 2.47 percent, compared with a forecast of 2.4625 percent in a Bloomberg News survey of four of the Fed’s primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.40, compared with 2.51 at the previous sale in August and an average of 2.23 at the past 10 auctions.

“The auction was surprisingly weak given the performance of the two-year note and the price action heading in,” said Lawrence Dyer, an interest-rate strategist in New York at HSBC Securities USA Inc., one of the 18 primary dealers required to bid at Treasury auctions. “The market seemed to be saying, why should I pay a premium when there will be more to buy next month?”

The existing five-year note yield rose three basis points to 2.45 percent at 1:26 p.m. in New York, according to BGCantor Market Data. The 2.375 percent security maturing in August 2014 fell 1/8, or $1.25 per $1,000 face amount, to 22 21/32. The 10- year note yield rose three basis points to 3.49 percent.

Indirect bidders, a class of investors that includes foreign central banks, bought 44.8 percent of the notes, compared with 56.4 percent at the August auction. The average at the past 10 sales is 40.6 percent.

Fed Meeting

“Indirects will continue to be strong and sevens are in that mix for sure so I would expect people to show up for the auction tomorrow,” said William O’Donnell, U.S. government bond strategist at primary dealer RBS Securities Inc. in Stamford, Connecticut.

The amount of five-year notes offered by the Treasury has surged from $14 billion at the start of 2008 to $40 billion this month as President Barack Obama borrows unprecedented amounts to revive the economy and service record deficits.

The Treasury is scheduled to sell $29 billion of seven-year debt tomorrow. Over the past three months, returns totaled 0.9 percent for two-year notes, 2.2 percent for five-year debt and 2.8 percent for 10-year Treasuries, according to indexes compiled by Merrill Lynch & Co.

Fed officials may signal that the U.S. economy has started to recover while maintaining their pledge to keep the benchmark interest rate near a record low for an “extended period.”


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