* Primary dealer takedown hits highest since November
* Bid-to-cover is lowest since November
* Poor seven-year auction not totally unexpected – analyst
By Gertrude Chavez-Dreyfuss
NEW YORK, March 26 (Reuters) – Soft demand for $44 billion in seven-year Treasuries on Thursday capped a week of disappointing auctions that reinforce concerns about the waning appeal of holding U.S. government debt as the Middle East war continues to grind on.
Investors have been dumping Treasuries in recent weeks, fearful that the spike in oil prices as a result of the war will lift inflation expectations. Auctions earlier in the week of two-year and five-year notes were equally weak, reflecting overall investor caution in allocating assets even in those widely-viewed as safe havens like Treasuries.
Against that backdrop, seven-year yields have jumped 36 basis points since the last auction in late February, as geopolitical risks reverberated across the curve.
The seven-year note auction numbers were generally weak across the board. “The poor demand for auctions this week more broadly is a function of worries about inflation due to Middle East uncertainty,” said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities in New York.
“The Federal Reserve is not looking to hike rates in the near term, but the market has pushed the pricing for rate hikes notably higher in the past few weeks. This is weighing on rates as investors are worried that the move can continue in the near-term absent a resolution in the Middle East.”
Primary dealers took in 12.4% of the total new issue, the largest takedown since November last year, analysts said, compared to an average of 11.5%. The figures suggested that there was low appetite for the latest note that primary dealers had to step in and absorb the remaining supply.
The bid-to-cover ratio, a measure of investor demand, was 2.43, a level not seen since September last year. This was also lower than the 2.46 average of the last six auctions.
U.S. seven-year Treasuries extended their selloff following the auction, further pushing their yields higher. The yield was last up 10.5 basis points (bps) at 4.252%.
The auction cleared at 4.255%, higher by nearly a basis point than the expected rate forecast before the bid deadline, which meant that market participants asked for a premium to take the note.
That said, the seven-year note’s underperformance was not totally unexpected, analysts said.
Vail Hartman, U.S. rates strategist at BMO Capital wrote in a research note that March has been seasonally soft for seven-year supply. Since 2010, he said 63% of auctions have come in weaker than expected. (Reporting by Gertrude Chavez-Dreyfuss Editing by Nick Zieminski)
