* Prices gain after first quarter GDP revised down
* Treasury's $35 bln five-year note sale sees weak demand
* Treasury to sell $29 bln seven-year notes on Thursday
By Karen Brettell
NEW YORK, June 26 U.S. Treasuries prices ended
higher on Wednesday on weaker than expected economic data,
though thin demand for the U.S. Treasury's new five-year notes,
even at higher yields, showed that jitters persist over when the
Federal Reserve is likely to pare back its purchase program.
The Treasury sold $35 billion in five-year notes to the
lowest demand since September 2009, with a bid-to-cover ratio of
2.45 times. The notes sold at a high yield of 1.48 percent, the
highest auction yield since July 2011.
Five-year and seven-year notes, which are the most sensitive
to future rate policy, have been the worst Treasuries performers
in a dramatic selloff since Fed Chairman Ben Bernanke said last
Wednesday that the U.S. central bank is likely to pare back its
bond purchases if economic momentum stays on track.
Investors remained nervous even though yields have increased
almost threefold since the beginning of May.
Five-year note yields last traded at 1.43
percent. They have increased from around 1.05 percent before
Bernanke's comments last week and from around 0.65 percent at
the beginning of May.
"The auction was relatively weak, though there was decent
end-user demand, as evidenced by the indirect bid," said Dan
Mulholland, managing director in Treasuries trading at BNY
Mellon in New York.
Direct bidders, which buy directly from the Treasury, all
but disappeared on Wednesday. Indirect bidders, which includes
fund managers and other investors who buy via dealers, bought 53
percent of the notes, the highest level since January 2010.
Still, overall demand was low even as selling by dealers
before the auction took yields up by around 2 basis points in an
effort to create a stronger sale.
This week's auctions have come at an awkward time as dealers
have limited capacity to hold many bonds going into quarter-end.
That said, other factors, including month-end extension buying,
may nonetheless help the Treasury sell $29 billion in seven-year
notes on Thursday, the final sale this week.
Traders expect the new seven-year notes to price at yields
of 1.97 percent, according to trading in the
"when-issued" market, around one basis point higher than the
notes are trading in the secondary market at 1.96 percent
Treasuries have shown signs of stabilizing this week and
traders said that foreign buyers have been active in the market,
a indication that the worst of selloff may be done for now.
Data on Wednesday that showed that U.S. Gross domestic
product likely expanded at a much weaker than expected pace in
the first quarter also added a boost to the bonds, and increased
speculation that the Fed may not be as near to an end of its
bond buying program as the market thinks.
"That has the market thinking that the Fed will not be
tapering perhaps as soon as what the market was thinking just
the other day," said Wilmer Stith, co-manager of the Wilmington
Broad Market Bond Fund in Baltimore.
The U.S. government slashed its estimate of first-quarter
economic growth to 1.8 percent, from the previous 2.4 percent.
The 10-year note on Wednesday rose 19/32 in
price to yield 2.54 percent, down from 2.614 percent on Tuesday.
The 30-year bond rose 26/32 in price to yield
3.57 percent, compared to 3.628 percent late on Tuesday.
The Fed bought $3.14 billion in notes due from 2020 to 2023
on Wednesday as part of its ongoing purchase program. It will
buy between $4.25 billion and $5.25 billion in notes due 2017
and 2018 on Thursday.
The Merrill Lynch MOVE index, which estimates
future volatility of long-term bond yields, fell on Monday for
the first time since June 17, two days before Bernanke's
comments. The index dropped to 108.4, from 111 on Friday, which
was its highest level since November 2011.
The index remains significantly higher than the multi-year
low of around 50 at the beginning of May.