Overseas Demand Rises at First U.S. Post-Shutdown Note Auction

The Treasury’s $30 billion auction of three-year securities attracted higher-than-average demand from an investor class that includes foreign central banks at the first U.S. note auction since the government shutdown.

Indirect bidders purchased 34.4 percent of the notes at the sale yesterday, compared with an average of 28.2 percent for the past 10 auctions. The notes sold at a yield of 0.710 percent, compared with a forecast of 0.718 percent in a Bloomberg News survey of eight of the Fed’s 21 primary dealers.

The sale comes after China and Japan, America’s largest foreign creditors with combined holdings of more than $2.4 trillion, raised pressure on the U.S. to resolve the impasse that has reached a week. The Treasury also sold $30 billion of one-month bills yesterday at a rate of 0.35 percent, the highest since 2008, with a bid-to-cover ratio of 2.75, the lowest since March 2009.

“So far, investors have tolerated the confusion in Washington, and foreign investors own a chunk of this universe, so they want to see it go well,” said Aaron Kohli, an interest-rate strategist at BNP Paribas SA in New York, one of 21 primary dealers that trade with the Fed. “A strong auction moves the focus to the 10- and 30-year sales. In this atmosphere all of the auctions have to go well in order to stave off worry.”

The yield on the current three-year note rose four basis points, or 0.04 percentage point, to 0.67 percent yesterday in New York, according to Bloomberg Bond Trader Prices. The yield on the benchmark 10-year note added one basis point to 2.63 percent.

Government Services

Nonessential U.S. government services have been closed for more than a week as politicians wrangle over a budget. Republicans want to change the 2010 Affordable Care Act, while President Barack Obama refuses to discuss conditions tied to opening the government or raising the debt limit. Treasury Secretary Jacob J. Lew said Congress needs to increase the debt ceiling by Oct. 17 or the nation risks defaulting on its payments.

A repeat of the “brinksmanship” that occurred in the 2011 debt ceiling debate as well as a technical default will lead to “further shedding of Treasuries from the foreign community,” JPMorgan Chase & Co. analysts including Alex Roever wrote in an Oct. 4 note to clients.

Foreign investors reduced their purchases of Treasuries buy an average of $30 billion a month in the months leading up to and following the resolution of the government shutdown in 1996 and the debt ceiling debate in 2011.

Direct bidders, non-primary dealer investors that place bids directly with the Treasury, purchased 19.7 percent of the notes yesterday. The average for the past 10 sales is 18.8 percent.

Bid Details

The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.05, compared with an average of 3.35 for the past 10 sales.

Three-year notes have lost 0.1 percent this year, compared with a decline of 2.5 percent by Treasuries overall, according to Bank of America Merrill Lynch indexes. The three-year securities returned 0.6 percent in 2012, while Treasuries overall gained 2.2 percent.

The auction was the first of three note offerings this week totaling $64 billion. The government will sell $21 billion of 10-year notes today and auction $13 billion of 30-year bonds tomorrow.

The sales will raise $31.7 billion of new cash, as maturing securities held by the public total $32.3 billion, according to the U.S. Treasury.

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