Treasuries Gain as Six-Day Price Decline Boosts Auction Demand

Treasuries rose for the first time in seven days as investors seeking the safety of shorter-maturity debt boosted demand at the U.S. sale of $32 billion in three-year notes.

The securities yielded 0.411 percent, below the average forecast of 0.413 percent in a Bloomberg News survey of seven of the Federal Reserve’s 21 primary dealers. Congress remained deadlocked over automatic spending cuts known as sequestration. Treasuries fell for the past six days as stronger-than-forecast U.S. economic data damped refuge demand.

“The auction went well,” said Michael Franzese, senior vice president of fixed-income trading at ED&F Man Capital Markets in New York. “There’s still some bad stuff going around. Sequestration is still looming over us.”

Benchmark 10-year note yields dropped four basis points, or 0.04 percentage point, to 2.02 percent at 4:17 p.m. in New York, Bloomberg Bond Trader prices showed. The price of the 2 percent security due in February 2023 increased 11/32, or $3.44 per $1,000 face amount, to 99 27/32. The yield on the current three-year note fell less than one basis point to 0.39 percent.

“The slightly elevated rate setting over the past week or so may have attracted some buyers,” said Kevin Flanagan, a Purchase, New York-based fixed-income strategist at Morgan Stanley Smith Barney.

The Fed has kept its benchmark interest-rate target at zero to 0.25 percent since 2008 to support the economy. Chairman Ben S. Bernanke said March 2 that premature increases would “carry a high risk of short-circuiting the recovery.”

Central Banks

Indirect bidders, an investor class that includes foreign central banks, purchased 20.6 percent of the notes sold today, compared with an average of 28.1 percent at the past 10 sales. They bought a record-low 18 percent at the last offering, on Feb. 12.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 23.4 percent of the notes, versus a record-high 26.9 percent in February and an average of 17.8 percent at the past 10 auctions.

“The Fed isn’t going to move any time soon, and that means we aren’t going to stray far from these levels,” said Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York.

Today’s yield matched the 0.411 percent at last month’s sale of the debt. The record-low three-year auction yield of 0.327 percent was reached at the December offering.

The bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 3.51 today, versus 3.59 percent at the February auction and a 3.61 average at the past 10 sales.

Treasury Losses

Three-year notes have lost investors 0.02 percent this year, compared with a return of 0.6 percent in 2012, according to Bank of America Merrill Lynch indexes. The broader Treasuries market has declined 1.1 percent this year after gaining 2.2 percent last year.

The Treasury Department is selling $66 billion in notes and bonds this week. It’s due to auction $21 billion of 10-year securities tomorrow and $13 billion of 30-year debt on March 14. The week’s sales will raise $25.5 billion of new cash, as maturing securities held by the public total $40.5 billion, according to the Treasury.

U.S. House Budget Committee Chairman Paul Ryan unveiled a revised tax-and-spending proposal today he said would eliminate the deficit within a decade by cutting $4.6 trillion out of a vast swath of federal expenditures, including Medicaid, food stamps and Pell college tuition grants.

‘Political Stalemate’

The Wisconsin Republican’s proposal will set up yet another budget battle in Washington, where lawmakers have yet to decide what to do about the $85 billion in cuts that took effect earlier this month under sequestration.

“The political stalemate is continuing with the Ryan budget, which means support for the bond market generally today,” GMP’s Miller said. “As long as there is anticipation that we will not see clarity on fiscal side it will keep business at bay and result in lackluster growth in the U.S. That then will support a bid for bonds.”

U.S. government securities rose earlier after data showing U.K. industrial production unexpectedly fell in January reignited concern global growth will slow. U.K. production fell 1.2 percent from December, when it rose 1.1 percent, the Office for National Statistics said in London. The median forecast in a Bloomberg News survey was for a 0.1 percent increase.

Stocks fluctuated. The Standard & Poor’s 500 Index snapped a seven-day winning streak and fell as much as 0.5 percent.

Data ‘Disappointment’

“There’s a little bit of disappointment about the economic figures around the globe, and that’s supportive of Treasuries,” said Ralf Umlauf, head of floor research at Landesbank Hessen-Thueringen in Frankfurt. “We are seeing weaker equity markets as well as bad figures from U.K. industrial production.”

Treasuries slid last week while investors sought higher-yielding assets as U.S. data spurred speculation the world’s biggest economy was improving.

The Labor Department reported March 8 that U.S. payrolls increased by 236,000 jobs in February, versus 165,000 projected by a Bloomberg News survey of economists. The unemployment rate unexpectedly fell to 7.7 percent, from 7.9 percent.

U.S. retail sales advanced in February for a fourth month, rising 0.5 percent, according to the median estimate of economists in a Bloomberg survey before the Commerce Department reports the figure tomorrow.

Before it's here, it's on the Bloomberg Terminal.