Treasury 3-Year Auction Yield Poised for Highest Since September

Treasury three-year notes are offering the highest yield since September before a $30 billion sale of the securities with the Federal Reserve considering raising its interest-rate target next year.

Benchmark 10-year notes were little changed after touching a more-than-one-week low yesterday. The three-year notes traded at 0.90 percent in pre-auction dealing, which would be the highest auction yield since 0.913 percent on Sept. 10. The Fed releases the minutes of its March policy meeting tomorrow after signaling last month a potential interest-rate increase for next year and making a third cut to the debt-purchase program it uses to support the economy.

“Everyone is looking for clarity around where the Fed wants the rate market to go,” said Aaron Kohli, an interest-rate strategist at BNP Paribas SA in New York, one of 22 primary dealers that trade with the Fed. “The Fed has diluted the signals that people had. That’s why the market is frozen in its tracks a bit. Any concession we can build into the auction would be very good.”

U.S. 10-year yields were little changed at 2.69 percent as of 11:52 a.m. in New York, according to Bloomberg Bond Trader data. The price of the 2.75 percent note due in February 2024 traded at 100 15/32. The yield fell to 2.68 percent yesterday, the lowest since March 28.

Note Sale

The three-year notes yielded 0.802 percent at a previous auction on March 11. Last month’s auction drew bids for 3.25 times the amount offered.

Primary dealers, those companies that are obligated to underwrite U.S. debt, purchased 54.6 percent of the securities, the most since June at the monthly auctions.

“Some auction pressure may be impacting yields in the U.S.,” said Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York.

U.S. three-year notes have returned 0.2 percent this year through yesterday, according to Bank of America Merrill Lynch indexes. Ten-year notes gained 3.7 percent, and 30-year bonds earned 8.3 percent, the data show.

The yield difference between 30-year bonds and five-year notes was 188 basis points after touching 187 basis points yesterday, the widest since March 21. The gap shrank to 178 basis points on March 31, the narrowest since October 2009.

Fed Funds

Traders’ wagers put the likelihood the Fed will start raising rates in June 2015 at 52 percent, based on futures trading on the CME Group Inc.’s exchange, compared with 54 percent on April 4. The Fed has kept its target for overnight lending between banks in a range of zero to 0.25 percent since 2008.

Fed policy makers at their March 18-19 meeting reduced monthly bond purchases by $10 billion to $55 billion. Fed Chair Janet Yellen said the central bank may start to increase interest rates “around six months” after ending its asset-buying program.

The U.S. will benefit from a longer period of record-low interest rates orchestrated by the Fed, strong private demand and the end of a fiscal drag that slowed growth last year, the International Monetary Fund said today.

“The U.S. recovery is the strongest among advanced economies and therefore in a way it’s pulling the world,” IMF chief economist Olivier Blanchard said in a video accompanying the World Economic Outlook report.

Growth Pattern

The IMF predicted global growth of 3.6 percent this year, compared with a January estimate of 3.7 percent. Next year, the expansion will accelerate to 3.9 percent, unchanged from the prior forecast.

Treasuries rose yesterday as investors bet jobs growth is slow enough to deter the Fed from accelerating cuts in its bond-purchase program. U.S. debt extended a rally from April 4, when a report showed employers added 192,000 jobs last month, less than the 200,000 projected by a Bloomberg News survey of economists.

The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, was little changed at 2.12 percentage points. The average during the past decade is 2.21 percentage points.

To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net

To contact the editors responsible for this story: Dave Liedtka at dliedtka@bloomberg.net Paul Cox, Greg Storey

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