Treasuries Extend Gains After Strong Demand for 7-Year Auction

(Bloomberg) -- Treasuries gained after a second day of strong demand at auctions, with a $28 billion sale of 7-year notes leaving primary dealers with their second-lowest share on record. The 10-year Treasury yield fell as much as 5 basis points after the auction, touching 2.459%, the lowest since Dec. 14, when the Federal Reserve raised interest rates for the first time this year and increased its rate forecasts for the next three years.

The 7-year notes were were awarded at 2.284%, the highest yield since April 2014, but more than 2 basis points lower than where they were trading at the bidding deadline, according to Stone & McCarthy. Direct bidders took 19%, the most since August 2014, offsetting a drop in the indirect award to 64% and leaving primary dealers with 17%, their smallest share since January and the second-lowest since Treasury started auctioning 7-year notes in 2009.

• The auction benefited from “pent-up demand and month-end buying, plus rebalancing flows out of stocks into bonds for year-end,” said Thomas Roth, head of Treasury trading at MUFG Securities Americas in New York
• Yesterday’s $34 billion 5Y auction also stopped through and produced record indirect allotment
• Traders were mindful of the possibility that liquidity will be especially limited on the last trading day of the year, when Sifma has recommended a 2pm ET close of trading for USD-denominated fixed-income cash market
• UST futures volume by 3pm was 55%-65% of 30-day averages across the curve
• 5s30s yield curve bull steepened after the auction; it was expected to face flattening pressure this week from large expected rebalancing from stocks to bonds based on quarterly performance and from month-end index extensions (+0.07 years estimated for the Bloomberg Barclays Treasury Index)
• 10-year yields fell across most developed markets, led by New Zealand, Australia and the U.K.; U.K. 10-year yield closed lower by 6.1 basis points, most euro-zone 10-year yields by 2-3 basis points. The U.S.-U.K. 10-year spread reached new highs above 126 basis points
• In U.S. economic data, jobless claims declined by 10,000 to 265,000 in the week ended Dec. 24 from a six-month high in the prior period, according to Labor Department data, matching the Bloomberg survey’s median forecast