Treasury three-year notes are trading at almost the the most expensive levels in more than seven months compared with two- and five-year debt, as the U.S. prepares to sell $32 billion of the securities.
The CHART OF THE DAY shows the butterfly index spread, which measures how the three-year note is performing against the other two securities, is around negative 30 basis points, just up from negative 31 basis points on Jan. 3, the most expensive since May 2012. A negative figure indicates investors are more bullish on the middle of the three securities, making it relatively expensive versus the others.
Three-year notes have richened since the Federal Reserve ended its stimulus program in December, known as Operation Twist, where the central bank sold short-term debt and bought an equal amount of long-term Treasuries to keep borrowing rates low. The Fed is now buying $45 billion of Treasuries a month of all maturities.
“Three-year notes are richer, but we’ve been at artificially cheapened levels because of the Fed’s sales, but the market is returning to an equilibrium,” said Scott Sherman, an interest-rate strategist at Credit Suisse Group AG in New York, one of 21 primary dealers that trade directly with the central bank. “With the persistent source of selling pressure from the Fed gone and the Fed still on hold, demand has returned to that sector, even at these levels.”
The three-year notes scheduled for sale today yielded 0.40 percent in pre-auction trading, compared with a record low 0.327 percent at the previous sale on Dec. 11.
Three-year note yields were little changed at 0.37 percent, according to Bloomberg Bond Trader prices. Two-year note yielded 0.25 percent, and the yield on the five-year note fell 2 basis points to 0.79 percent.
The butterfly-index spread is calculated by replicating a trade that involves the sale of the two- and five-year securities, as the chart pattern’s wings; buying double the amount of three-year notes, as the body; and multiplying by 100.
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