The Treasury’s $30 billion three-year note auction attracted stronger-than-average demand, as investors exacted the highest yields since September with the Federal Reserve signaling borrowing costs will rise next year.
The notes, sold yesterday at a yield of 0.895 percent, drew the most demand from investors that place bids directly with the Treasury since February 2013. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount offered, was 3.36. The average at the past 10 auctions was 3.29.
“Investors are being very careful at these levels, and that’s what you saw in the auction,” said Thomas Simons, a government-debt economist in New York at Jefferies LLC, one of 22 primary dealers that bid at Treasury auctions. “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.”
Fed Chair Janet Yellen said last month the central bank may raise interest rates six months after ending its debt-purchase program. It has kept the target for overnight lending between banks in a range of zero to 0.25 percent since December 2008. Even so, Yellen said March 31 that slack in labor markets showed that the central bank’s accommodative policies will be needed for some time.
“ There hasn’t been a big fundamental change in the economic backdrop and there is still a wait-and-see mentality and a desire from the market to see further evidence that the economy is on firm footing to justify the Fed’s policy rate projections,” said William Marshall, an interest-rate strategist in New York at Credit Suisse Group AG, a primary dealer.
The yield at the sale compared with a forecast of 0.892 percent in a Bloomberg News survey of seven primary dealers.
Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 24 percent of the notes at the sale, compared with an average of 16.1 percent for the past 10 auctions.
Indirect bidders, an investor class that includes foreign central banks, purchased 27.3 percent of the notes, 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.
The offering was the first of three note and bond auctions this week totaling $64 billion. The government will sell $21 billion in 10-year debt today and $13 billion in 30-year securities tomorrow.