Auction of 5-Year Treasury Notes Meets Strong Investor Demand

Investors snapped up a record $22 billion in five-year notes sold by the government Tuesday, with demand exceeding the amount bid at the last quarterly auction in February.

With the number of bids exceeding the number of available securities by 1.7 times, demand for the new five-year notes was the highest since the government sold $16billion of the securities in November. Investors were lured to the note’s 4.475% yield, which exceeds that on the current five-year note, 4.33%.

“There was solid demand for the notes,” said Chris Rupkey, senior economist at Bank of Tokyo Mitsubishi Ltd. “Dealers wish they could price supply this well all the time.”

The yield on the notes sold Tuesday was the highest since Aug. 8, 2001, when the securities yielded 4.67%. At the February auction, the notes yielded 4.254%.

The government plans to follow up Tuesday’s sale with an $11-billion auction of 10-year notes today to help finance the first budget deficit in five years. Instead of paying off $89 billion in debt this quarter as projected in January, the government has said it will have to borrow a net $1 billion as a recession crimps tax revenue.

The securities will be used to refund about $9 billion in privately held bonds and raise about $24 billion in cash, the government said. This week’s auctions are the largest since August 1999, when the government borrowed $37 billion.

Buyers were attracted to the five-year notes because their yields are well above the 1.75% federal funds rate, traders said, providing banks and other lenders the opportunity to profit on the interest rate spread.

At 4.475%, the note also attracted investors on expectations that the Federal Reserve will refrain from raising interest rates until at least midyear, analysts said. A bigger-than-expected surge in first-quarter productivity, reported Tuesday, supported that view. As expected, policymakers left rates unchanged at a 40-year low of 1.75%.

Tuesday’s “productivity report shows that people are working more and earning less,” said Sadakichi Robbins, head of fixed-income sales and trading at Bank Julius Baer. “Combined with the recent decline in equities, that will lead to a loss of confidence and weaker final demand in the second and third quarters. The Fed won’t move until at least September,” making the securities “a good buy.”