Treasury Draws Record Demand at $32 Billion Three-Year Note Sale
The Treasury (YCGT0025) attracted record demand at today’s $32 billion auction of three-year notes as concern that a resolution to Europe’s sovereign-debt crisis is far off drove investors to the safety of the securities.
The auction’s bid-to-cover ratio, which gauges demand by comparing total bids with the amount of notes offered, was 3.73, the highest since at least 1993, when the government began releasing the data. Yields on U.S. debt securities were little changed. German Chancellor Angela Merkel was meeting International Monetary Fund Managing Director Christine Lagarde as pressure grows to complete a Greek debt resolution.
“There is still strong risk aversion in the market,” said Adrian Miller, fixed-income strategist at Miller Tabak Roberts Securities LLC in New York. “There is still enough headline risk out there that it should keep the Treasury market relatively in check and in this very narrow range.”
The yield on the current three-year note was little changed at 0.36 percent at 5 p.m. in New York, according to Bloomberg Bond Trader Prices. The yield on the benchmark 10-year note rose one basis point, or 0.01 percentage point, to 1.97 percent.
The three-year notes sold today drew a yield of 0.37 percent, compared with a forecast of 0.371 percent in a Bloomberg News survey of nine of the Federal Reserve’s 21 primary dealers.
Indirect bidders, an investor class that includes foreign central banks, purchased 38.5 percent of the notes, compared with an average of 37 percent for the past 10 sales. Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 5.3 percent of the notes at the sale, versus an average of 11.86 percent for the past 10 auctions.
Volatility Drops
Three-year notes returned 3.4 percent last year, compared with a gain of 9.8 percent for Treasuries overall, according to Bank of America Merrill Lynch indexes.
The butterfly-chart spread by Treasury two-, three- and five-year yields is about negative 37 basis points, approaching negative 30 basis points, the cheapest level since October 2009, which makes the security relatively low cost versus the others.
Volatility in the Treasury market has dropped to its lowest level in almost seven months. Bank of America Merrill Lynch’s MOVE index, which measures price swings in Treasuries based on prices of over-the-counter options maturing in two to 30 years, fell to 78.6 yesterday, the lowest point since June 13. The 2011 average was 94.14, with a high of 117.8 on Aug. 8 and a low of 71.5 on May 31.
Traders on ‘Sidelines’
“The uncertainty and complications in Europe are pushing people to the sidelines,” said David Ader, head of government- bond strategy at Stamford, Connecticut-based CRT Capital Group LLC. “Three-year notes are looking relatively cheap, given the atmosphere.”
The Treasury will sell $66 billion in securities this week, including $21 billion of 10-year securities tomorrow and $13 billion in 30-year bonds on Jan. 12. The auctions will raise $30.5 billion of new cash as $35.5 billion of maturing securities are held by the public, according to Treasury Department data.
The rise in Treasury yields has been limited in part because of the European debt crisis. Demand for havens from the crisis drove 10-year Treasury yields down more than 140 basis points in 2011.
“The market is not quite a believer in the risk-on story,” said Anthony Cronin, a trader in New York at Societe Generale, one of the primary dealers that are required to bid at the auction. “There are still a lot of concerns.”
Final Negotiations
Euro-area leaders may complete a new budget rulebook aimed at containing the crisis by Jan. 30, a month early, and are considering accelerating capital contributions to the region’s bailout fund, Merkel said yesterday.
Greece is in final negotiations to persuade investors to forgive at least half of its debt, the euro area’s first large- scale restructuring, as Greeks are told to gird for more austerity if they want to keep the euro.
More than two months after the accord was announced, creditors and authorities still need to agree on the coupon and maturity of the new bonds to determine the total losses investors would suffer.
The Federal Reserve bought $1.39 billion of Treasury Inflation Protected Securities today as part of its program to replace $400 billion of short-term debt in its portfolio with longer-term TIPS in an effort to reduce borrowing costs further and counter rising risks of a recession.
To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Susanne Walker in New York at swalker33@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
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