Treasuries Rise as Demand for 3-Year Notes Is Most in 14 Months

Treasuries rose, pushing 10-year note yields down for a fourth day, after the U.S. sale of $30 billion in three-year debt attracted the most demand in more than a year from a group of investors that includes pension funds and insurers.

Direct bidders for the three-year securities, non-primary-dealer investors that place their bids directly with the Treasury, purchased 24 percent of the notes, the most since February 2013. U.S. debt rallied after an April 4 government report showed U.S. jobs increased in March less than projected. The Federal Reserve will release minutes of its March 18-19 meeting tomorrow, adding detail about the decision to reduce monthly bond-buying to stimulate the economy and consideration of an interest-rate-target increase next year.

“Investors are expecting higher rates and improving, better data, but the reality is we need to see it, and we haven’t,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co.

U.S. 10-year yields fell two basis points, or 0.02 percentage point, to 2.68 percent as of 5:03 p.m. in New York, according to Bloomberg Bond Trader data. The price of the 2.75 percent note due in February 2024 gained 5/32, or $1.56 per $1,000 face amount, to 100 18/32. The yield touched the lowest level since March 28.

The yield on the current three-year note was little changed at 0.85 percent.

Auction Detail

The three-year note auction drew a yield of 0.895 percent, compared with a forecast of 0.892 percent in a Bloomberg News survey of seven of the Fed’s 22 primary dealers. The auction yield compared with 0.802 percent at last month’s sale and was the highest since 0.913 percent on Sept. 10. The auction yield was last 1 percent or higher on May 10, 2011.

The bid-to-cover ratio at the auction, which gauges demand by comparing total bids with the amount of securities offered, was 3.36, versus an average of 3.3 for the past 10 sales.

The direct bid level exceeded the average of 16.1 percent for the past 10 auctions.

“The direct bid was very strong, which can be a harbinger of good news for the rest of the week’s sales,” said Thomas Simons, a government-debt economist in New York at Jefferies Group LLC, a primary dealer that is required to bid at the auctions. “Investors are being very careful at these levels, and that’s what you saw in the auction. The front end has been anchored for a long time by the Fed and there is a shifting dynamic in place. Investors are trying to figure out what the next step will be toward normal monetary policy.”

Foreign Investors

Indirect bidders, an investor class that includes foreign central banks, purchased 27.3 percent of the notes, the lowest since April 2013 and compared with an average of 34.9 percent for the past 10 sales.

Three-year notes have gained 0.2 percent this year, compared with a 1.8 percent return by Treasuries overall, according to Bank of America Merrill Lynch indexes. The three-year securities lost 0.1 percent in 2013, while Treasuries overall fell 3.4 percent.

Today’s offering is the first of three note and bond auctions this week totaling $64 billion. The government will sell $21 billion in 10-year debt tomorrow and $13 billion in 30-year securities on April 10.

The sales will raise $13.5 billion of new cash, as maturing securities held by the public total $50.5 billion, according to the U.S. Treasury.

Fed Watch

Benchmark 10-year yields rose earlier today. After the last Fed policy meeting, Chair Janet Yellen said the central bank may start to increase interest rates “around six months” after ending its asset-buying program.

“What the market is trying to figure out is how much, how fast and when,” said Thomas Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “Pension funds and insurance companies are looking to pick up yield. It’s people trying to get incremental yield.”

Fed Bank of Minneapolis President Narayana Kocherlakota said the central bank should consider additional methods to stimulate the economy. Kocherlakota dissented from the Fed’s March 19 statement, saying the central bank needs to do more to push up inflation toward 2 percent.

“We need to do better as a committee,” Kocherlakota said in remarks prepared for delivery to the Rochester Area Chamber of Commerce in Minnesota. Inflation is “too low” and does not look likely to rise back to the Fed’s 2 percent goal for another four years.

“Kocherlakota was more dovish than usual, and we had a decent auction, which has given the day a bullish backdrop,” said Jason Rogan, managing director of U.S. government trading at Guggenheim Securities LLC, a New York-based brokerage for institutional investors. “The weak jobs data last week killed off any concern about inflation and calmed concerns about the Fed hiking rates.”

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