Nobody Mourns Death of QE as Treasuries Prove Insatiable.

http://www.bloomberg.com/news/2014-11-03/bond-market-demand-for-treasuries-means-nobody-mourns-end-of-qe.html

Even with the end of unprecedented bond purchases from the Federal Reserve, demand for U.S. Treasuries looks as strong as ever.

Investors submitted bids for $5.54 trillion of government debt at auctions this year, or 3 times the amount sold, data compiled by Bloomberg show. The bid-to-cover ratio is higher than the 2.87 last year, when the Fed purchased more Treasuries than at any time since the central bank began quantitative easing in 2008, and has been exceeded only twice on record.

While the Fed has been the biggest source of demand since the financial crisis, the willingness of foreign central banks, insurers and pensions to pick up the slack as it wound down its third and most aggressive round of stimulus suggests there’s plenty of buyers to keep U.S. borrowing costs low. Yields on the 10-year note, the benchmark for trillions of dollars of debt securities, have fallen about 0.7 percentage point to 2.33 percent since the Fed started tapering in January.

“There may not be enough Treasuries to go around,”William O’Donnell, the head U.S. government bond strategist at RBS Securities Inc., one of the 22 primary dealers obligated to bid at Treasury auctions, said in a Oct. 27 telephone interview from Stamford, Connecticut. “We watched the Fed slow its purchases and yet rates are still falling.”

The Fed ended its latest round of quantitative easing, commonly known as QE, in October after amassing $790 billion of Treasuries and $813 billion of mortgage-backed bonds through monthly purchases that began in January 2013.

QE Legacy

The program, which the Fed started in December 2008, was intended to restore demand and lower borrowing costs after the credit crisis by inundating the U.S. economy with cheap cash. In all, the central bank added $3.96 trillion of bonds through QE and more than quadrupled its assets from less than $1 trillion since the stimulus measures were first announced.

With the Fed winding down its buying this year, most Wall Street prognosticators anticipated Treasuries would slump, pushing up their yields. (USGG10YR) That hasn’t happened as buyers such as foreign central banks and pension funds stepped up their own purchases. Treasuries have returned an average of 4.9 percent this year, index data compiled by Bloomberg show.

Demand at U.S. Treasury auctions, where $1.85 trillion of interest-bearing government bonds have been sold, is on pace to be the third highest in data compiled by Bloomberg going back to 1992 and compares with the record 3.15 times in 2012.

Auction Demand

Before the financial crisis, the bid-to-cover ratio never topped 2.65. The proportion of purchases from investors, rather than bond dealers, has also increased to 58 percent, the highest level since at least 2003.

Foreign investors added more Treasuries in August than any time this year and now hold a record $6.07 trillion of the debt, the most recent data from the Treasury Department showed.

Investors have poured into Treasuries even as yields hover close to historical lows. Yields on the 10-year note, which plummeted below 2 percent last month, averaged close to 5 percent in the decade prior to the financial crisis.

One of the biggest reasons why U.S. government bonds may remain in demand, even as the economy gains momentum, is because lackluster wage growth has constrained household spending and any resultant pressure on consumer prices that would erode the value of fixed income payments.

Customers shop at a Costco Wholesale Corp. store in Louisville, Kentucky, U.S. Weekly earnings for full-time employees are still lower than in the period just before the recession and the buying power of workers’ paychecks is no higher than it was in 1999.