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Treasuries Gain as Three-Year Note Auction Draws Record

Treasuries rose the most in three weeks as the U.S. sale of $32 billion in three-year notes met record demand after the International Monetary Fund cut its economic forecasts, boosting the appeal of the safest assets.

Treasury 10-year note yields dropped earlier amid European Central Bank President Mario Draghi’s comments that the common-currency bloc faces risks from financial instability. It extended losses as the IMF warned of even slower expansion unless officials in the U.S. and Europe address threats to their economies. The Treasury is selling $21 billion of 10-year securities tomorrow and $13 billion of 30-year debt on Oct. 11.

“The auction had a very strong direct bid, which is consistent with investor interest rather than dealers,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “The ongoing uncertainty in Europe, the inconclusive employment data domestically and the prospect for a slowing global economy continue to add downward pressure on yields.”

The yield on the current three-year note was little changed at 0.34 percent at 5 p.m. in New York, according to Bloomberg Bond Trader Prices. The yield on the benchmark 10-year note fell three basis points, or 0.03 percentage point, to 1.71 percent after dropping as much as six basis points, the most since Sept. 18. Thirty-year bonds fell 5 basis points to 2.93 percent.

Notes Auction

The three-year notes sold today drew a yield of 0.346 percent, compared with a forecast of 0.350 percent in a Bloomberg News survey of nine 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 a 3.96, topping the previous high last month of 3.94 and an average of 3.56 for the previous 10 sales.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 22.5 percent of the notes at the sale, versus an average of 9.3 percent for the prior 10 auctions. Indirect bidders, an investor class that includes foreign central banks, purchased 28.8 percent of the notes, compared with an average of 33.9 percent for the past 10 sales.

The Treasury’s $66 billion in notes and bonds auctions this week will raise $26.7 billion of new cash, as maturing securities held by the public total $39.3 billion, according to the U.S. Treasury.

The Federal Reserve bought $1.889 billion of Treasuries maturing from February 2036 to August 2042 today as part of its program to replace $267 billion of short-term debt in its portfolio with longer-term Treasuries in an effort to reduce borrowing costs further and counter rising risks of a recession.

‘Rate Guidance’

Fed Chairman Ben S. Bernanke last week defended the central bank’s bond-buying program, saying officials will sustain record stimulus even after the domestic expansion gains strength. The Fed said on Sept. 13 it will keep the main interest rate at almost zero until at least mid-2015 and buy $40 billion of mortgage debt every month in a third round of so-called quantitative easing.

“The Fed’s rate guidance continues to buoy front-end notes, so three-year notes should stay well bid,” said Thomas Simons, a government-debt economist in New York at Jefferies Group Inc., which as a primary dealer is required to bid at Treasury auctions. “Front-end paper hasn’t had a problem being bought.”

‘Alarmingly High’

The world economy will expand 3.3 percent this year, the slowest pace since the 2009 recession, and 3.6 percent next year, the IMF said. That compares with July predictions of 3.5 percent in 2012 and 3.9 percent in 2013. The Washington-based lender said there is an “alarmingly high” risk of a steeper slowdown and it sees a one-in-six chance that growth will slip below 2 percent.

The ECB’s Draghi said there is no alternative to austerity as Italian and Spanish officials balk at asking for bailouts that may impose more budget cuts, further depressing their economies.

Europe’s sovereign-debt crisis “still weighs,” said Sean Murphy, a trader at primary dealer Societe Generale SA in New York. “There are unanswered questions as to how they resolve their situation and stabilize things and promote growth. It just keeps you committed to believing that rates are low for a long period of time.”

Three-year notes have gained 0.5 percent this year, compared with a 1.8 percent return for Treasuries overall, according to Bank of America Merrill Lynch indexes.

Mixed Views

While JPMorgan Chase & Co. forecasts a “year-end storm in the market for U.S. Treasuries,” Barclays Plc advises buying government bonds and cutting investment-grade company debt. Bank of America Corp. recommends high-grade bonds over both junk-rated and U.S. government notes. The three firms are rated the best at fixed-income research by Institutional Investor magazine.

Ten-year Treasury yields will rise to 1.75 percent by Dec. 31 and to 2.06 percent by the end of June, according to a Bloomberg News survey of economists, with the most recent projections given the heaviest weightings.

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