Treasuries fell a third day as the U.S. sold $28 billion of three-year securities at the highest yield since May 2011 amid signs the economic expansion is strengthening.
Yields on current three-year notes climbed to a three-month high as small-business optimism rose to the highest level since before the worst recession since the Great Depression, adding to speculation the Federal Reserve will start raising interest rates next year. The U.S. plans to sell $21 billion of 10-year securities tomorrow and $13 billion in 30-year bonds on June 12.
“Between the upcoming Fed meeting and supply considerations later this week, not to mention a generally bearish trend for the Treasury market overall, ambition to add exposure to front-end Treasuries has been muted,” Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut.
Three-year yields rose three basis points, or 0.03 percentage point, to 0.89 percent at 5 p.m. New York time, the highest since May 8, according to Bloomberg Bond Trader data. The 0.875 percent note due in May 2017 fell 3/32, or 94 cents per $1,000 face amount, to 99 31/32.
Benchmark 10-year yields climbed four basis points to 2.64 percent, rising for the eighth time in nine days. They touched 2.65 percent, the highest since May 13, and have gained from 2.4 percent on May 29, the lowest level since June 2013.
The Bloomberg Global Developed Sovereign Bond Index has returned 3.9 percent this year, compared with a loss of 4.6 percent in 2013.
The three-year notes sold today yielded 0.930 percent, compared with a forecast of 0.924 percent in a Bloomberg News survey of eight of the Federal Reserve’s 22 primary dealers.
The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.41, versus 3.4 at the last sale.
The Fed’s 22 primary dealers, which are obliged to bid at U.S. debt auctions, took 54.1 percent of the securities, the most since March.
Indirect bidders, an investor class that includes foreign central banks, purchased 26.5 percent of the notes, compared with an average of 33.6 percent at the past 10 sales. Direct bidders, non-primary-dealer investors that place bids directly with the Treasury, purchased 19.4 percent, compared with an average of 18.8 percent at the past 10 auctions.
Three-year notes have returned 0.5 percent this year, compared with a gain of 2.6 percent by the broader Treasuries market, 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 sales will raise $30 billion of new cash, as maturing securities held by the public total $32 billion, according to the U.S. Treasury.
Treasury 10-year notes are in such short supply in the $1.6 trillion-a-day market for borrowing and lending securities that it may lead to a surge in failed trades.
Traders are willing to pay to borrow the notes in the repurchase-agreement market in exchange for loaning cash overnight for the most actively traded 10-year maturity, with rates reaching negative 2.95 percent today, according to data from ICAP Plc tracked by Bloomberg.
Many times traders short, or sell securities they’ve borrowed in the repo market, before a Treasury sale to profit if prices of the securities fall after the auction. The U.S. is selling $21 billion of the securities tomorrow.
When traders crowd into bets on falling prices for 10-year notes before a re-opening of the securities, “generally it skews the market to expecting a fairly strong auction,” said Aaron Kohli, an interest-rate strategist at primary dealer BNP Paribas SA in New York. “It does suggest there will be at least some captive buyers. The question is, how wide is the short base.”
Treasuries fell earlier as optimism among small-businesses rose to 96.6 in May from 95.2 the prior month, the National Federation of Independent Business reported, the highest since September 2007. The median forecast of 16 economists and strategists in a Bloomberg survey was for a reading of 95.8.
“If small businesses are turning more optimistic, that’s generally positive for the economy as a whole,” said Gary Pollack, who manages $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York. “If that’s the case, you might see slightly upward pressure on yields.”
The Fed is tapering its monthly asset purchases, while keeping the target for overnight lending between banks in a range of zero to 0.25 percent. Policy makers signaled at their April 29-30 meeting that interest rates will stay low for a “considerable time.” They next meet on June 17-18.
The chance of a rate increase to 0.5 percent or more by March 2015 is 16 percent, according to data compiled by Bloomberg based on federal fund futures. The odds of an increase by December of next year are 72 percent.
Shorter-maturity debt tends to track what the Fed does with its benchmark rate, while longer-term securities are more influenced by the outlook for inflation.