Treasuries best place to be as investors binge at US auctions




Buyers snapped up $56 billion in Treasury debt at auctions this week, lured by higher yields than found in most other developed nations, as slow global growth and mixed U.S. economic data complicate the Federal Reserve’s efforts to raise interest rates.
With investors buoyed by an April 14 report showing benign consumer-price inflation, demand was so strong at that day’s sale of 30-year Treasuries that Wall Street dealers were left with the lowest percentage ever for an auction of the maturity.
And with U.S. 10-year yields higher than comparable-maturity debt of 17 other developed nations, demand at an April 13 sale of the securities increased from a group of investors that includes foreign central banks. The elevated auction appetite came as U.S. yields rose this week.
The appeal of Treasuries in a world of low-yielding sovereign debt has sent returns on U.S. securities due in 10 years or more to 9.4 percent, according to Bloomberg U.S. Treasury Bond Index data.
The European Central Bank is set to announce its next policy decision on April 21 after lowering rates last month.
The implementation of negative rates by the ECB and the Bank of Japan has pulled bond yields lower abroad and boosted the comparative attractiveness of U.S. securities, even as the Fed aims to tighten monetary policy.
“The U.S. has become the deepest, highest-yielding bond market out there,” said Gennadiy Goldberg, a New York-based interest-rate strategist for TD Securities (USA) LLC, one of 22 primary dealers obligated to bid at Treasury sales. “The fact that you saw such great demand at the long-end auctions underscores how little high-quality product there is out there with attractive yields.”

Yield Gap
The benchmark U.S. 10-year note yield rose four basis points this week, or 0.04 percentage point, to 1.75 percent in New York, according to Bloomberg Bond Trader data. The price of the 1.625 percent security due in February 2026 fell 10/32, or $3.13 per $1,000 face amount, to 98 27/32.
The gap between U.S. and German 10-year yields climbed to 1.63 percentage points, while the difference between U.S. and Japanese 10-year yields rose to 1.87 percentage points.
U.S. 30-year bond yields rose one basis point to 2.56 percent, versus 30-year bonds in Germany yielding 0.80 percent and similar-maturity debt in Japan yielding 0.39 percent.
Indirect bidders, a category of investors that includes foreign central banks and mutual funds, bought about 65 percent of the U.S. 30-year bonds at this week’s $12 billion auction, the most since September, leaving primary dealers with 24.1 percent, the lowest level on record.

Fed Path
At the $20 billion 10-year auction, indirect bidders bought 60 percent, up from 56.5 percent at the March sale. They purchased 56 percent at the $24 billion three-year sale on April 12, the most since January.
Demand for U.S. debt has also climbed as the Fed last month rolled back the number of rate increases it expects to implement this year, to two from four. Atlanta Fed President Dennis Lockhart said April 14 he will no longer push for a rate increase this month in light of weakening growth and still-low inflation.
The International Monetary Fund this week cut its world expansion forecast and warned of global stagnation.
Futures contracts indicate traders assign about a 50 percent chance that the Fed will raise rates this year. The calculation assumes the effective fed funds rate will average 0.625 percent after the next hike.
“When we began the year, the bias was geared toward higher rates and several rate increases by the Fed,” Kevin Giddis, head of fixed income at Raymond James & Associates in Memphis, Tennessee, wrote in a note to clients.
“Now it looks like that might be a better strategy for 2017, not 2016.”

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