Here comes the supply, probably had to monetize a bunch of this POS, and of course the cheap "loans" ($1.557 billion worth) were there on the permanent side to help out
ny.frb.org
U.S. Five-Year Treasuries Unchanged After $15 Bln Auction; TIPS Decline
July 7 (Bloomberg) -- U.S. five-year Treasury notes were unchanged after the government's $15 billion sale of the securities at the lowest yield in three months failed to spark demand. Ten-year inflation-protected debt, which will be auctioned tomorrow, fell.
The bid-to-cover ratio, which compares the dollar amount of bids to the $15 billion of securities sold, was 2.33, down from 2.91 at June's five-year note auction. Investors are less inclined to buy Treasuries with the Federal Reserve raising its key interest rate and inflation accelerating.
``There was incredible apathy going into the auction,'' said Lundy Wright, head of government bond trading at Nomura Securities International Inc. in New York. His firm is one of the 22 primary dealers of U.S. government securities required to bid at the auctions. ``Nobody really wants'' Treasuries.
At 5:15 p.m. in New York, the 4 percent note maturing in June 2009 was priced at 101 11/16 to yield 3.62 percent, according to bond broker Cantor Fitzgerald LP. The 2 percent Treasury-Inflation Protected Security due in January 2014 dropped almost 1/4, or $2.50 per $1,000 face amount, to 100 78/16. Its yield rose 3 basis points, or 0.03 percentage point, to 1.95 percent.
The yield on the new five-year note was 3.66 percent, compared with 3.65 percent in pre-sale trading, which shows dealers were awarded more securities than they expected and now have to find buyers, said Scott Gewirtz, co-head of Treasury trading in New York at Deutsche Bank AG, another primary dealer.
At last month's sale of five-year notes, the yield was 4.01 percent, compared with 4.02 percent just before that auction.
`Too Low'
Investors have pushed the yield down from the high this year of 4.10 percent on June 14 on speculation the Fed won't accelerate the pace or size of interest-rate increases. A Bloomberg News survey released today shows the economy may expand this year at its fastest pace since 1999, when the yield averaged 5.54 percent.
``Yields are too low relative to the economy,'' Paul Calvetti, head of U.S. Treasury trading at Barclays Capital Inc. in New York, said before the sale. Barclays is another primary dealer. ``I don't think there is any incentive for investors to buy'' at these yields.
The median forecast of 55 economists surveyed by Bloomberg News from June 25 to July 6 is for the economy to expand 4.5 percent this year.
At today's auction, indirect bidders, a category that includes foreign central banks, bought 38.5 percent of the notes, down from 56.6 percent at the previous auction.
Japan, the largest foreign holder of Treasuries, refrained from selling its currency for a third month in June. The country has poured some of the dollar proceeds from its yen sales into U.S. debt. Japan owned $645.9 billion of Treasuries as of April, up from $401.9 billion a year earlier.
TIPS Auction
Tomorrow, the Treasury Department will sell $10 billion of 10-year TIPS.
Demand for TIPS has increased on signs of faster inflation. The difference in yield between fixed-rate 10-year bonds and 10- year TIPS is 2.52 percentage points, compared with a low this year of 2.15 percentage points on Jan. 15. The average for the past five-years is 1.89 percentage points. The difference is the expected inflation rate over the life of the notes.
Inflation-linked debt pays interest at lower rates than regular Treasuries on a principal amount that grows in line with increases in consumer prices. Regular Treasuries pay fixed annual interest and a set amount of principal at maturity.
The median forecast of 50 economists surveyed by Bloomberg News in another poll from June 25 to July 6 is for the consumer price index to rise 2.7 percent this year, compared with 1.9 percent in 2003. Inflation erodes the value of fixed-income payments.
Fed's Ferguson
Fed Vice Chairman Roger W. Ferguson Jr. said policy makers may be more aggressive in raising the benchmark interest rate if they are wrong that recent signs of faster inflation are ``transitory.'' The Fed boosted its target rate for overnight loans between banks last Wednesday to 1.25 percent from a four- decade low of 1 percent. Ferguson votes on monetary policy.
``Perhaps the inflation picture has deteriorated somewhat'' this year, Ferguson said to the audience after a speech to the New York Association for Business Economics. ``We cannot be complacent about that, but some of those factors that drive inflation do seem to be transitory.''
With little new economic data this week, Nomura's Wright said today was ``one of the quietest days ever'' for trading. Next week, investors get the latest readings on retail sales and consumer prices.
Investor Sentiment
Investors should remain ``cautious'' on bonds over the next two or three years, said David Malpass, chief economist at Bear Stearns Cos. The firm is another primary dealer, which also trade with the Fed's New York branch.
``We've been in this very low interest rate environment for the last two or three years, trying to get out of deflation,'' Malpass said in an interview. ``Interest rates are only 1.25 percent from the Fed. They're normally 4 percent. We've got quite a bit of interest rate hikes to get through, and so that creates an unfavorable environment in general for bonds.''
The median forecast of the more than 5o economists surveyed by Bloomberg News is for the 10-year note's yield to rise to 5.10 percent by year-end.
A weekly J.P. Morgan Chase & Co. survey showed 28 percent of investors expect lower government debt prices, down from 40 percent the previous week. In May, the number reached 54 percent, the highest since the survey began in 1992.
Twelve percent expect a rise, unchanged from the previous week. The remaining 60 percent were neutral, up from 48 percent and the highest in more than six months, according to the bank, which doesn't say how many investors were polled.
``The data recently has been coming in a bit weaker,'' said Jeremy Fletcher, who helps oversee $7 billion of bonds at American Century Investment Management in Mountain View, California. ``That's lowering the probability of the need for more aggressive tightening by the Fed going forward.''
Growth in productivity of U.S. workers is likely to slow for the next few years, said the Fed's Ferguson also said.
``My sense is that cyclical factors contributed to the most recent advances and thus a slowing in productivity growth is likely,'' Ferguson said. |
