Treasuries Remain Lower After $32 Billion Three-Year Note Sale

Treasuries remained lower as the government sold $32 billion of three-year notes in the first of three note and bond sales this week totaling $66 billion after President Barack Obama said he will agree to extend his predecessor’s tax cuts for two years.

The securities drew a yield of 0.862 percent, compared with the average forecast of 0.841 percent in a Bloomberg News survey of 6 of the Federal Reserve’s 18 primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.91. The average at the past 10 auctions was 3.15.

Investors “feel rates are going to rise,” Thomas L. di Galoma, head of U.S. rates trading at Guggenheim Partners LLC, a New-York based brokerage for institutional investors, said before the auction. “There’s a case to be made for a risk-on trade. Money’s flowing into the system, it looks like the economy’s being reflated by the Federal Reserve, and you just got a tax cut.”

The yield on the existing three-year note rose 13 basis points, or 0.13 percentage point, to 0.82 percent at 1:05 p.m. in New York, according to BGCantor Market Data. The benchmark 10-year yield gained 18 basis points to 3.10 percent.

Indirect bidders, a class of investors that includes foreign central banks, bought 36.7 percent of the notes, compared with 35 percent in the November auction. The average for the past 10 sales is 44 percent.

Direct Bidders

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 18 percent of the debt, compared with 13.9 percent last month and a 10-sale average of 13.2.

The last sale of three-year notes, on Nov. 8, drew a yield of 0.575 percent. The U.S. will auction $21 billion of 10-year notes tomorrow and $13 billion of 30-year bonds on Dec. 9.

Three-year notes have returned 4.9 percent this year, compared with 7.3 percent for the overall Treasury market, according to Bank of America Merrill Lynch indexes.

Obama said he would accept a lower rate for the estate tax than Democrats wanted in order to break a stalemate over extending George W. Bush’s tax cuts before Congress adjourns.

The current tax rates, enacted in 2001 and 2003, are set to expire Dec. 31. Without the compromise, middle-income families would become “collateral damage for political warfare here in Washington,” Obama said in televised remarks yesterday.

Bond ‘Catalyst’

“The policy compromise has been the catalyst to take us through 3 percent on the 10-year note,” said Suvrat Prakash, an interest-rate strategist in New York at BNP Paribas, which as a primary bidder is required to bid at Treasury auctions. “Yields in the front end are relatively high.”

Treasuries fell before reports this week that economists said will show fewer Americans filed claims for unemployment benefits and consumer confidence rose.

Jobless claims decreased by 11,000 to 425,000 in the week ended Dec. 4, according to the median forecast of 48 economists before the Labor Department’s report Dec. 9. The Thomson Reuters/University of Michigan preliminary index of consumer sentiment rose to 72.5 in December from 71.6 in the prior month, a separate Bloomberg survey showed before the Dec. 10 report.

German 10-year government bonds, the euro region’s benchmark securities, dropped as traders speculated that Ireland will win parliamentary approval for an austerity plan as it seeks to seal an international bailout.

Ireland Spending Cuts

Irish Finance Minister Brian Lenihan told parliament in Dublin today that while cutting spending by 6 billion euros ($8 billion) next year is “demanding,” it shows the government’s commitment to reducing the budget deficit.

The German 10-year yield rose as much as nine basis points to 2.94 percent, the highest level since May 13.

Treasuries rallied yesterday, pushing the 10-year note yield down the most since Nov. 16, after Fed Chairman Ben S. Bernanke said in an interview broadcast Dec. 5 on CBS Corp.’s “60 Minutes” program that the central bank may boost debt purchases to support the economy. The central bank bought today $6.81 billion of Treasuries maturing from December 2014 to May 2016, according to the New York Fed’s website.

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