9-11-13 4:17 PM EDT | Email Article

By Ben Eisen, MarketWatch


NEW YORK (MarketWatch) -- Bond investors on Wednesday bought a record debt sale from Verizon Communications Inc. alongside an auction of 10-year Treasury notes, in one indication that investors still demand fixed-income securities even as interest rates rise.


Yields have been rising sharply across the bond market since early May as fears grow about how and when the Federal Reserve will scale back its bond-purchase program. But even after the well-bid glut of supply, yields in the Treasury market fell.


The 10-year Treasury note (10_YEAR) yield, which moves inversely to price, fell 6 basis points to 2.909%, while the 30-year bond (30_YEAR) yield fell 5 basis points to 3.844%. The 5-year note (5_YEAR) yield fell 6.5 basis points to 1.707%.


"Whenever you see good demand, that will always play a role [in helping the market], but I think it's much simpler than that. The market has begun to reach bearish extremes," said Jonathan Lewis, chief investment officer at Samson Capital Advisors. "The market has built in more than taking a few chips off the table. It's built in taking lots of chips off the table."


Verizon (VZ) sold $49 billion of bonds to help finance its $130 billion buyout of a 45% stake in its wireless operations from Vodafone Group PLC (VOD). The size of the deal surged past the previous record issuance set by Apple Inc. (AAPL) earlier this year of $17 billion.


Despite the size of the sale, investors showed strong demand for the attractive yields on the debt, with buyers bidding up prices immediately after the bonds were allocated. The 10-year Verizon note priced at 2.25 percentage points over comparable Treasurys to yield 5.192%. ((Read more about the Verizon sale demand http://blogs.marketwatch.com/thetell/2013/09/11/verizon-bonds-big-demand-shows-investor-hunger-for-income/.).)


Much of the allocation of the deal went to long-term holders of debt such as pension funds and insurance companies. That left other buyers with less than they would have liked, according to Matt Duch, portfolio manager at Calvert Investments, who participated in the sale.


"Some of the largest accounts were treated better than the general population," he said, noting that as one reason bond prices rose in the "gray market" where debt trades unofficially before issuance.


The Verizon sale coincided with an auction of $21 billion in 10-year Treasury notes Wednesday, which came just an hour after the corporate bonds priced. Nonetheless, buyers showed up to bid on the debt.


The notes sold at a high yield of 2.946%, 2 basis points below where the broader market was trading at the time. Buyers offered to buy 2.86 times the amount of debt sold, comparing favorably to the average of 2.71 times in the last 6 sales.


Direct bidders such as domestic money managers put in a particularly strong bid, buying 29.6% of the sale, compared with the recent average of 19.9%. Indirect bidders bought 36.6% of the sales compared with the recent average of 42.6%.


"Today was a textbook-like supply/demand day where markets handled each supply event one at a time. In our view, this serial behavior allowed for market participants to discount pricing more effectively and ultimately allowing for relatively smooth absorption of what was a large supply day," said George Goncalves, head of interest-rate strategy at Nomura Securities, in a note.


Nomura gave the auction a grade of "A".


The 10-year note sale follows a successful 3-year note (3_YEAR) auction on Tuesday and comes before a $13 billion sale of 30-year bonds on Thursday.


The large amount of supply this week has momentarily eclipsed the bond market's longer-term concerns about when the Federal Reserve will move to scale back its $85 billion in monthly bond buys. Questions about the pace and timing of the so-called taper have pushed yields sharply higher since the beginning of May, temporarily sending the 10-year Treasury yield above 3% last week.


The Fed keeps a close watch on economic data as an indicator of whether the economy is strong enough to shift its monetary policy. On Wednesday, U.S. wholesale inventories showed a 0.1% rise and wholesale sales increased 0.1% in July.


U.S. stocks closed higher on Wednesday.

-Ben Eisen; 415-439-6400; AskNewswires@dowjones.com


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(END) Dow Jones Newswires

09-11-13 1617ET

Copyright (c) 2013 Dow Jones & Company, Inc.
Copyright 2014 MarketWatch
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Morningstar - 2013/9/11 - UPDATE: Verizon sale, 10-year auction yield strong results
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