Treasuries Fall as Three-Year Note Sale Yield Exceeds Forecast

Treasuries declined for a second day as the government sold $32 billion in three-year notes at higher-than-forecast yields amid signs record U.S. budget deficits may be stabilizing.

The notes drew a yield of 0.411 percent, compared with a forecast of 0.409 percent in a Bloomberg News survey of seven of the Federal Reserve’s 21 primary dealers. Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased a record amount for the third straight auction, while indirect bidders, an investor class that includes foreign central banks, bought the all-time lowest amount. The U.S. government posted a January budget surplus for the first time in five years, reflecting higher revenue from payroll and individual income taxes.

“We are at an equilibrium point in the market,” said Justin Lederer, an interest-rate strategist at Cantor Fitzgerald LP in New York, a primary dealer required to bid at the auctions. “The whole yield curve is very range bound and we should continue to stay near these levels until there is a reason to break out.”

Benchmark 10-year note yields rose two basis points, or 0.02 percentage point, to 1.98 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. The 1.625 percent note due in November 2022 decline 1/8, or $1.25 per $1,000 face amount, to 96 28/32.

The yield on the current three-year note gained one basis point to 0.40 percent.

Bidding Details

Treasury is due to sell $24 billion of 10-year securities tomorrow and $16 billion of 30-year bonds the next day.

The bid-to-cover ratio at today’s note sale, which gauges demand by comparing total bids with the amount of securities offered, was 3.59, matching the average for the past 10 sales. The record-low three-year auction yield of 0.327 percent was reached Dec. 11.

Direct bidders purchased 26.9 percent at today’s sale, topping a record 26.4 percent of the notes at the January sale. The average for the past 10 auctions is 15.9 percent.

The direct bids are “a function of confidence that the Fed remains on hold, as upside risk on yield in the front end are limited” Adrian Miller, director of fixed income strategies at GMP Securities LLC in New York, said in a telephone interview. “We’ve rising yields on the long end since the last auctions, which should bring investors in.”

Auction Data

Indirect bidders purchased 18 percent of the notes, the lowest on record, compared with 28.4 percent at the previous sale and the average of 30.3 percent for the past 10 sales.

Markets in Hong Kong, China, Singapore, Malaysia and Taiwan are closed for Lunar New Year holidays today.

“The holidays and technical currency issues weighed on the indirect bid,” said Thomas di Galoma, a managing director at Navigate Advisors LLC, a brokerage for institutional investors in Stamford, Connecticut. “The auction performed well, and isn’t moving from where we are. Now the question turns to the long-end auctions, and the questions will be whether we have cheapened up enough or not.”

This week’s auctions will raise $8 billion of new cash, as maturing securities held by the public total $64 billion, according to the Treasury.

Price Swings

Volatility in Treasuries dropped yesterday to 60 basis points, close to the 59.9 basis points reached on Feb. 7, the lowest level in two weeks, according to Bank of America Merrill Lynch’s MOVE index, which measures price swings based on options.

The measure reached 51 basis points on Dec. 3, the lowest level of price swings since the gauge begin in April 1988. It hit a 2012 high of 95.4 basis points on June 15. Volatility climbed to 264.6 basis points in October 2008 as the financial crisis intensified.

Treasury trading volume rose to $246.7 billion, after falling yesterday to the lowest level since Jan. 7, according to ICAP Plc, the largest inter-dealer broker of U.S. government debt. Daily volume has averaged $297.9 billion in 2013.

Budget Update

U.S. government receipts exceeded outlays by $2.88 billion, compared with a $27.4 billion deficit in January 2012, according to Treasury Department data issued today in Washington. Economists projected a $2 billion shortfall, according to the median estimate in a Bloomberg survey. The nation had a $17.8 billion surplus in January 2008.

Economists said a government report tomorrow will show U.S. retail sales increased for a third month in January. U.S. retail sales increased 0.1 percent last month after a 0.5 percent advance in December, according to the median forecast of economists surveyed by Bloomberg News before tomorrow’s Commerce Department report.

Treasuries handed investors a 0.8 percent loss this year through yesterday, according to Bank of America Merrill Lynch indexes. Three-year notes have lost 0.02 percent this year, after returning 0.6 percent last year.

The 10-year note will yield 1.96 percent at the end of June and 2.24 percent by Dec. 31, according to the weighted average forecast of economists in a Bloomberg survey.

The Fed purchased $3.3 billion of securities maturing between February 2020 and November 2022 today as part of its plan to bolster the economy.

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