November 27, 2018 / 8:04 PM / 6 months ago

TREASURIES-Yields lower on strong bond auction, Trump tariff threats

(Recasts; adds auction news, analyst quote; updates yields)

By Kate Duguid

NEW YORK, Nov 27 (Reuters) - Treasury yields fell on Tuesday afternoon after $40 billion of new five-year notes were sold to strong demand and on resurgent worries about U.S.-China trade tensions.

The Treasury Department sold new five-year notes on Tuesday afternoon in the biggest auction of this maturity since May 2010. Bond issuance has risen steadily this year to pay for President Donald Trump's tax cuts and spending increases. Strong results today and at the two-year auction Monday could help waylay fears that the increased supply will diminish demand.

The bid-cover ratio, a measure of overall demand, was 2.49 on Tuesday, the strongest since August. Direct bidders, a group of buyers that bypass Wall Street and place orders directly with the government, took 10.3 percent of the supply, a significant rebound from the 1.9 percent they took last month.

There was an increase in "basically all the good metrics you want to see for demand," said Guy LeBas, chief fixed income strategist at Janney Montgmery Scott LLC.

The five-year auction is the second of four note auctions this week which in total will see $129 billion of new supply sold. Monday's two-year note auction was also strong, with the most demand from direct bidders since February 2017.

LeBas noted, however, that the five-year note is a special case because monolithic investment manager BlackRock has expressed interest in the maturity, citing chief investment officer Rick Rieder's Twitter feed. That interest, he said, has led to aggressive demand around the five-year portion of the yield curve.

Treasury prices were also driven higher by rising trade tensions, as U.S. government debt is seen as a safe-haven investment in times of political uncertainty.

Ahead of a meeting on tariffs between Trump and Chinese President Xi Jinping at the G20 summit in Argentina this weekend, Trump said it was "highly unlikely" he would accept China's request to hold off on raising tariffs on $200 billion of Chinese imports. The remarks were made in an interview with the Wall Street Journal in which Trump also repeated his threat to place tariffs on all remaining imports from China.

The benchmark 10-year government yield was down 1.5 basis points from Monday's close, last at 3.06 percent. The five-year yield was down 1.5 basis points to 2.89 percent and the two-year note yield was down 0.3 basis point to 2.83 percent. (Reporting by Kate Duguid; Editing by David Gregorio and Chizu Nomiyama)

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