US Treasury prices climbed modestly on Wednesday after an auction of five-year notes garnered strong demand, including solid interest from foreign central banks.
Indirect bidders, mainly offshore central banks, picked up 40 percent of the issue, beating last month's 34.6 percent - the second strongest showing from such institutions since the Treasury began reporting the figures last May.
The sale of $16 billion in new five-year Treasury notes went at a yield of 3.26 percent and drew bids for a hefty 2.50 times the amount on offer, well above the 2.09 average of last year's sales.
Dealers believe offshore central banks account for much of the indirect bidding as they spend some of the dollars they have been amassing in recent days.
The Bank of Japan is thought to have bought an astonishing $28 billion in just the first two days of this week in an attempt to support the yen.
Much of this money is assumed to have ended up in Treasuries, a reasonable hunch given that foreign central bank holdings of Treasury and agency debt ballooned by $224 billion last year to a record $1.07 trillion, and by $91 billion last quarter alone.
But traders warned that if and when the US currency manages to stem its recent slide, bond prices are bound to suffer.
"Until investors see stabilisation of the dollar they are willing to wait, figuring these people are always going to be in there intervening and putting that money to work in our market," said Vincent Verterano, head government bond trader at Nomura Securities.
"If we get one week when the dollar is stable, whether that's today, tomorrow, or in June, I think people will start selling the market," he added.
The benchmark 10-year note rose 7/32, taking yields to 4.25 percent from 4.27 percent. The 30-year bond added 11/32 for a yield of 5.08 percent.
Two-year Treasury note yields eased to 1.81 percent from 1.83 percent late Tuesday.
Among official speakers on Wednesday, US Treasury Secretary John Snow was predictably upbeat on the economy while arguing that a projected budget deficit of $500 billion this year was manageable.
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