By Cordell Eddings and Ruby Madren-Britton
Sept. 23 (Bloomberg) -- 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.”
Central bank officials may also discuss changing the size and duration of their plan to buy as much as $1.25 trillion of mortgage-backed securities and $200 billion of agency debt by the end of this year, said former Fed governor Laurence Meyer, now vice chairman of St. Louis-based Macroeconomic Advisers LLC.
Reverse Repos
Fed officials have started talks with bond dealers to use so-called reverse repurchase agreements to drain some of the cash the central bank has pumped into the economy, according to people with knowledge of the discussions. There’s no sense that policy makers intend to withdraw funds anytime soon, said the people, who decline to be identified.
The FOMC is scheduled to issue its statement at around 2:15 p.m. Futures contracts on the Chicago Board of Trade show just a 6.7 percent likelihood of the Fed increasing its benchmark rate this year, down from odds of 12.5 percent a month ago. The central bank cut the rate to a range of zero to 0.25 percent in December to help combat the recession.
The Fed has helped support Treasuries by scooping up as much as $300 billion of the debt to cap consumer borrowing costs, a program it began in March and plans to finish in October.
The central bank’s efforts have helped bring down U.S. 30- year fixed mortgage rates to 5.16 percent yesterday from this year’s high of 5.74 percent in June, according to Bankrate.com in North Palm Beach, Florida. Average interest rates on new car loans fell to 3.43 percent from 8.42 percent at the end of last year, according to the central bank.
Fannie, Freddie
U.S. banks increased holdings of government securities and debt of mortgage companies Fannie Mae in Washington and Freddie Mac in McLean, Virginia, to $1.37 trillion in the week ended Sept. 9 from $1.16 trillion a year earlier, Fed data show.
A Bloomberg survey of banks and securities companies projects 10-year rates will climb to 3.58 percent by year-end, with the most recent forecasts given the heaviest weightings.
U.S. home resales and orders for long-lasting goods probably rose in August, extending gains that have signaled the U.S. is emerging from the worst recession since the 1930s, economists said before reports tomorrow and Sept. 25.
To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Ruby Madren-Britton in New York at rmadrenbritt@bloomberg.net.
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