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Treasury 3-Year Auction Yield Set for Highest Since September

March 10 (Bloomberg) -- Treasury three-year notes yielded the most since September in pre-auction trading before the U.S. sells $30 billion of the securities as investors bet the economic expansion is gaining traction.

The prices of benchmark 10-year securities fluctuated after Federal Reserve Bank of Philadelphia President Charles Plosser said officials must be aware of the risk of loose monetary policy. A report last week showing U.S. employers added more jobs than forecast last month bolstered speculation Fed policy makers will continue to taper bond purchases. The U.S. kicks off $64 billion in notes and bonds sales this week with the three-year notes auction tomorrow.

“We still don’t know how much weather held down” the jobs number, said Michael Cloherty, head of U.S. interest-rate strategy in New York at Royal Bank of Canada’s RBC Capital Markets unit, one of 22 primary dealers that trade directly with the Fed. “Weather and downward revisions” to fourth-quarter growth data have stirred debate among investors.

U.S. 10-year yields dropped one basis point, or 0.01 percentage point, to 2.78 percent at 5 p.m. New York time after falling as much as three basis points and rising one. The 2.75 percent security due February 2024 gained 3/32, or 94 cents per $1,000 face value, to 99 3/4.

The yield advanced to 2.82 percent on March 7, the highest level since Jan. 23. It was 115 basis points more than 10-year German bunds, the most in more than seven years.

Auction Yield

Three-year notes yielded 0.81 percent in when-issued trading before tomorrow’s auction, which would be the highest since the Sept. 10 sale yielded 0.897 percent. Current three-year note yields fell one basis point to 0.76 percent.

“For some at the shorter end, any expectation that the Fed would slow tapering has now been reduced to zero,” said Dan Greenhaus, chief global strategist in New York at BTIG LLC. “What you’re seeing at the short end is a push to higher yields as that expectation is priced out of the market.”

Investors deposited $86.1 million into exchange-traded funds of U.S. fixed-income securities on March 7, less than the 20-day average of inflows of $648.5 million, according to ETF data compiled by Bloomberg.

Investors have favored ETFs U.S. stocks, which took in $1.1 billion on March 7, less than the 20-day average of $2.1 billion, Bloomberg data show.

U.S. fixed-income ETFs have taken in $9 billion so far this year, compared with $3.9 billion in outflows from domestic equity funds, Bloomberg data show.

‘Brief Pop’

Treasuries rose earlier as China reported the biggest trade deficit in two years, driving demand for the safety of U.S. debt. China’s overseas exports declined 18.1 percent in February from a year earlier, data showed March 8, compared with analysts’ median estimate for a 7.5 percent increase.

“The market is likely to see a little bit more of a selloff in the auctions,” said Jason Rogan, managing director of U.S. government trading at Guggenheim Securities LLC, a New York-based brokerage for institutional investors. “There was some bond-positive news with weaker Chinese export numbers, and added concerns to issues in the Ukraine. The market, after a brief pop, hasn’t had a rally to it.”

The Treasury will follow the three-year notes sale with auctions of $21 billion in 10-year debt on March 12 and $13 billion in 30-year bonds the next day.

Economic Data

U.S. employers added 175,000 jobs in February, versus the projection of 149,000 in a Bloomberg News survey of economists.

The economy grew at a 2.4 percent annualized pace in the last three months of 2013, below the initial estimate of 3.2 percent as well as the median forecast in a Bloomberg News survey of 2.5 percent, the Commerce Department said Feb. 28.

Data this week will show U.S. retail sales rebounded in February and consumer confidence rose in March, based on economists’ forecasts.

“The market sort of psyched itself up for better numbers and then got better numbers, and it’s not yet ready to presume that every number is going to get better now,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee. “You certainly have domestic sentiment toward no change in Fed policy.”

Plosser, who votes on policy this year, said today that recent economic data in the U.S. is “encouraging” though it isn’t enough to change the pace of the central bank’s asset purchases under its quantitative-easing stimulus program.

‘Unintended Consequences’

“We should be aware of the unintended consequences of monetary policy around the world,” Plosser said in a Bloomberg Television interview with Manus Cranny in Paris. “We have initiated programs and policies that we have never tried before and we have to be cautious in thinking about the risk that policies engender and worry about those to make sure that they do not get out of line and overtake the economy in a negative way.”

Fed Chair Janet Yellen said in February that the central bank’s bond-purchase program will probably end in the fall if the economy grows as policy makers anticipate. The central bank’s next policy meeting is March 18-19.

The Fed has reduced its monthly asset purchases by $10 billion a month in January and February, to $65 billion. It bought $2.473 billion of Treasuries today due from May 2022 to November 2023 as part of the program to cap longer-term borrowing rates and spur growth.

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

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

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