(Adds quotes, details and background on indirect bidders)
By Kate Duguid
NEW YORK, Feb 21 (Reuters) - Investors showed fair demand for the $35 billion of five-year notes auctioned by the U.S. Treasury Department on Wednesday, part of a bumper sales week as the government boosts issuance to help fund President Donald Trump’s tax overhaul and a two-year budget deal.
This week’s issuance of $258 billion is the second-largest amount ever over a three-day period and just $1 billion short of the record set in August 2010.
The federal debt load is expected to swell by as much as $1.5 trillion because of the tax overhaul signed into law in December, while the budget agreement would boost government spending by almost $300 billion over the next two years.
“Overall it was a pretty fair auction. Treasuries have been very quiet today so the auction came in on the screws,” said Justin Lederer, analyst at Cantor Fitzgerald in New York.
The auction showed direct bidders, or large institutions that buy Treasuries directly from the government, taking 12.7 percent, the highest since August 2017.
Indirect bidders, meaning institutions that buy through an intermediary, took 58 percent of the offer, the smallest since April 2017. Dealers took 29.3 percent.
The percentage taken by dealers, which are required to buy unbid supply, was just below the average of the past four auctions.
The smaller share of indirect bidders may signal weaker foreign demand, as that share has historically been seen as a proxy for overseas buying.
“There is still some relationship there,” said Aaron Kohli, interest rates strategist at BMO Capital Markets in New York.
Foreign banks are a significant buyer of U.S. Treasuries, so any decrease in that demand would impact the United States’ fundraising capacity.
“Indirect demand was kind of weak,” said Kohli of Wednesday’s five-year auction. “We’ve been noticing some Japanese outflows, which were probably based on the inability to hedge that exposure … The real strength came from direct buyers, which in a vacuum, I’d peg as large domestic money managers.”
Investors will now focus on the sale of $28 billion of seven-year notes on Thursday.
“The seven-year is a good level for a lot of these foreign accounts to participate in, so we’ll be watching very closely,” said Lou Brien, market strategist at DRW Trading in Chicago.
The yield on the seven-year note was last at 2.869 percent, near its highest level since April 2011.
The five-year notes sold at a yield of 2.658 percent versus 2.660 percent at the bid’s close, with a 2.44 bid-to-cover ratio.
That ratio, which indicates the demand for an offering relative to the number of investor bids, hit the average of the past four auctions despite the increased issuance size.
The five-year Treasury yield was initially little changed following the auction. It later climbed to 2.689 percent, its highest level since April 2010, after minutes from the Federal Reserve’s latest policy meeting showed confidence in the need to keep raising interest rates.
The five-year auction followed an issuance of two-year floating rate notes earlier on Wednesday to weak demand. The 2.75 bid-to-cover ratio was the lowest on record since the issue was introduced in January 2014, according to Tom Simons, senior money market economist at Jefferies LLC in New York.
Expectations the Fed could raise interest rates as many as four times in 2018 had helped propel the two-year Treasury yield to a nine-year high of 2.282 percent in overnight trading. (Reporting by Kate Duguid; Editing by Megan Davies and Meredith Mazzilli)