Treasury Sells Three-Year Notes at Highest Yields Since 2011

Treasuries were little changed after the U.S. sold $32 billion of three-year notes at the highest yields since June 2011 amid speculation the Federal Reserve is preparing to reduce debt purchases.

The notes yielded 0.719 percent, more than double the 0.354 percent at the May 28 auction. Yields have increased on bets the U.S. economy is strong enough to allow Fed Chairman Ben S. Bernanke and policy makers to start trimming the asset buying that has helped cap borrowing costs. The Fed will release minutes of its June 18-19 meeting tomorrow.

“The auction saw strong demand with these attractive yield levels after the intense selloff we’ve seen,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “At some point, the market expects the Fed will taper. But the Fed won’t raise rates any time soon, which puts a lid on how high rates can go.”

The yield on the current three-year note was little changed at 0.68 percent at 5 p.m. in New York, according to Bloomberg Bond Trader Prices.

The yield on the benchmark 10-year note was 2.63 percent. The 1.75 percent note maturing in May 2023 traded at 92 3/8.

Bidder Participation

“We’ve stabilized at these levels and now people are starting to see value,” Tom Simons, an economist in New York at Jefferies LLC, one of 21 primary dealers obligated to bid at U.S. debt auctions, said before the sale. “We’ve had a pretty dramatic move in yield since the last auction.”

The notes sold today were forecast to yield 0.724 percent in a Bloomberg News survey of seven of the Fed’s primary dealers.

The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.35, versus 2.95 at the previous auction and the highest since May.

Indirect bidders, an investor class that includes foreign central banks, purchased 35.6 percent of the notes, compared with an average of 26.2 percent for the past 10 sales, and the highest since September.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 13 percent of the notes at the sale, up from June’s 8.4, which was lowest since August, and compared with an average of 19.9 percent for the previous 10 auctions.

Primary dealers bought 51.5 percent of the notes, the lowest since January.

‘International Interest’

The central bank is buying $85 billion of bonds a month to put downward pressure on borrowing costs. Bernanke said on June 19 that policy makers may begin slowing purchases this year should the U.S. economy meet the central bank’s goals.

The Treasury Department is selling $66 billion in notes and bonds this week, including $21 billion of 10-year securities tomorrow and $13 billion of 30-year debt on July 11.

Based on “where yields are, you’ll see international interest in the 10-year,” said Tom Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “The hawkishness of Friday’s prices was overdone.”

The sales this week will raise $5.6 billion of new cash, as maturing securities held by the public total $60.4 billion, according to the Treasury.

Trimming ‘Shorts’

Treasury three-year notes have lost 0.5 percent this year, compared with a return of 0.6 percent in 2012, according to Bank of America Merrill Lynch indexes. The broader Treasuries market has declined 3.1 percent this year after gaining 2.2 percent last year.

Investors in Treasuries remained net short this week even as they trimmed the bets that prices of the securities will drop, according to a survey by JPMorgan Chase & Co.

The proportion of net shorts was at 4 percentage points in the week ending yesterday, down from 6 percentage points in the previous week, according to JPMorgan.

Outright longs, or bets the securities will increase in value, rose to 15 percent, from 13 percent, the survey said, while outright shorts remained at 19 percent. Investors cut neutral bets to 66 percent from 68 percent.

“We believe the rate selloff is beginning to peter out,” Ira Jersey, an interest-rate strategist at primary dealer Credit Suisse Group AG in New York, wrote in a note to clients. Ten-year notes “will end the year around 2.75 percent.”

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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