Bond yields jump as Treasury note sale sees weak demand
The Treasury is selling nearly $100 billion of new government debt this week, and it’s finding that a lot of potential buyers are busy with other things — like holiday vacations.
The result is another surge in bond yields, heaping more misery on fixed-income investors already battered by the jump in interest rates since October.
Treasury market yields rose Tuesday after the government’s sale of $35 billion in new five-year notes drew weak demand.
The annualized yield on the notes sold was 2.15%, the highest market yield on five-year securities since June and up from the rate of 2.04% on Monday on already issued five-year notes.
“There was virtually no bright spot in what is likely one of the weakest five-year auctions in recent memory,” said George Goncalves, a bond strategist at Nomura Securities International in New York.
Poor demand from institutional investors forced Wall Street dealers to take 58% of the notes for their own accounts, compared with an average of 47% in the previous six auctions.
But does that dearth of demand mean investors believe that bond yields will go even higher in 2011 — or is it just a function of the calendar, with so many market players gone this holiday week?
Bill O’Donnell, a debt strategist at RBS Securities in Stamford, Conn., thinks it’s more the latter. Taxpayers, he said, are paying the price for the Treasury’s decision to sell bonds in “a market that is barely open” because of holiday absences on Wall Street.
Still, the Treasury’s $35-billion two-year note auction Monday had gone well, raising hopes that buyers would turn out for the five-year sale as well.
The government is scheduled to wrap up its final debt auction of the year Wednesday, when it will sell $29 billion in seven-year notes.
Investors pushed the yield on existing seven-year notes to 2.88% on Tuesday from 2.72% on Monday.
Treasury yields have been rising sharply for the last two months, in part reacting to data indicating that the U.S. economy has been gaining steam.
The five-year T-note yield bottomed at 1.03% on Nov. 4, a date that seems like an eternity ago for bond investors.
Two key economic reports Tuesday — on October home prices and December consumer confidence — were downbeat, which should have encouraged bond investors who believe that the economy’s momentum will fade in 2011 and that interest rates soon will drop again. But that sentiment didn’t register in the Treasury market.
For many investors in bond mutual funds, December can’t end soon enough: Rising market yields have depressed fund share prices, leading to the steepest losses on bond funds since the financial-system meltdown in the fall of 2008.
The Vanguard Total Bond Market exchange-traded fund fell 52 cents, or 0.6%, to $79.52 on Tuesday, its lowest share price since May. The fund’s “total return” — principal change plus interest earnings — is a negative 3.2% since Nov. 4, when the shares hit their all-time high.
