Treasuries Rise as 3-Year Note Auction Draws Most Bids on Record

Treasuries rose as the government’s auction of three-year notes attracted the highest demand on record, bolstered by investors seeking a refuge from Europe’s sovereign debt crisis.

The $32 billion sale of notes drew a yield of 0.379 percent, compared with a forecast of 0.393 percent in a Bloomberg News survey of eight of the Federal Reserve’s 21 primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.41, the most since at least 1993, and compared with an average of 3.21 for the past 10 sales. Treasuries rose earlier as a budget vote in Italy fueled concern Europe’s debt crisis will spread.

“The three-year part of the curve was perceived to be cheap coming in to the auction,” said Christopher Sullivan, who oversees $1.9 billion as chief investment officer at United Nations Federal Credit Union in New York. “It signals there’s tremendous uncertainty with respect to global macro-economic risk.” The so-called yield curve measures the difference between yields of different maturity securities.

The yield on the current three-year note fell one basis point to 0.37 percent, at 1:28 p.m. in New York, according to BGCantor Market Data. The yield on the benchmark 10-year note fell two basis points to 2.01 percent. A basis point is 0.01 percentage point.

Auction Bids

Indirect bidders, an investor class that includes foreign central banks, purchased 38.7 percent of the notes, compared with an average of 35.9 percent for the past 10 sales.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 19.9 percent of the notes at the sale, compared with an average of 11.8 percent for the past 10 auctions.

“With continued economic concerns around the globe and the end of the year coming, demand is still very strong for the front end,” said Justin Lederer, an interest-rate strategist at the primary dealer Cantor Fitzgerald LP in New York, before the auction. “The big question will be what happens in the rest of the week’s auctions.”

The Treasury stopped selling three-year securities in 2007 as it cut back on the range of maturities for U.S. government debt sales as the budget deficit narrowed to $162 billion in 2007 from a then-record $412.8 billion in 2004. It had also suspending the offerings in 1998 when the U.S. recorded its first budget surplus since 1969.

Three-Year Sales

Sales of the securities resumed in November 2008 as the U.S. sought to raise money to bolster the economy and the financial system following the collapse of Lehman Brothers Holdings Inc.

The auction will raise $2.6 billion in fresh cash as more than $29.4 billion of maturing three-year securities are held by the public and the Fed, including $23.9 billion by the public and $5.5 billion by the central bank, according to Treasury data.

The Treasury is selling $72 billion in notes and bonds this week. It’s due to auction $24 billion of 10-year securities tomorrow and will sell $16 billion of 30-year debt on Nov. 10.

Three-year notes have returned 3.2 percent this year, compared with a gain of 8.8 percent for Treasuries overall, according to Bank of America Merrill Lynch indexes.

Italian Prime Minister Silvio Berlusconi won a vote today in parliament on last year’s budget report, without mustering an absolute majority.

European Central Bank council member Jens Weidmann said the ECB can’t bail out governments by printing money.

“One of the severest forms of monetary policy being roped in for fiscal purposes is monetary financing, in colloquial terms also known as the financing of public debt via the money printing press,” Weidmann said in a speech in Berlin today.

The extra yield investors demand to hold Italy’s 10-year bonds instead of similar-maturity Treasuries climbed to 4.69 percentage points, the fourth-highest among bond markets for euro-region nations, after Greece, Portugal and Ireland.

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