Treasury Auction Demand Hits 15-Month Low

Matching a 15-month low is demand for US Treasury’s sale of $24 billion in 10-year notes, this as investors anticipate an interest rate increase next year implemented by the Federal Reserve.

At 2.52, matching the lowest level since August 2013 was the bid-to-cover ratio, used to gauge demand through a comparison of total bids to the amount offered. For the past 10 sales, this ratio was at 2.7. In addition, the least since June of last year were the notes sold yesterday at a yield of 2.365%. However, at that rate, notes were still above the 2.356% that eight of 22 primary dealers with the Fed forecasted ahead of the auction.

Aaron Kohli, interest-rate strategist with New York-based BNP Paribas SA, and a primary dealer mandated to bid at Treasury debt sales, said the current yield levels are not as attractive as they could be.

According to five primary dealers, on a scale of 1 to 5 with one equaling a failed auction, the auction ranked a 3, putting it at an “average” level. Kohli added with some uncertainty about the sale, coupled with no meaningful concession prior to the auction, enthusiasm for the long-end is wavering and yields should keep moving within this range.

Following November 10 when the Treasury auctioned off $26 billion of 3-year notes at a 0.998% yield, today the US will sell $16 billion of 30-year bonds.

Of the 10-year notes, 44.7% were purchased by indirect bidders, a class that includes foreign central banks, down from the average over the past 10 sales of 45.4%. In comparison, 13.4% of the 10-year notes were purchased by direct bidders, those considered non-primary dealer investors who place bids directly with the Treasury. For the past 10 auctions, direct bidders took on average 16.4% of the notes.

In a statement from Justin Lederer, interest-rate strategist at Cantor Fitzgerald, LP, a primary dealer in New York, this level makes some people nervous but it appears the market does not want to veer too far. Pertaining to the long-bond sale, this is a wild card and beast of its own.

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