U.S. 3-Year Note Sale Draws Most Demand in 10 Months on Fed Bets

Treasury three-year notes rose after the U.S. sold $30 billion of the debt to the strongest demand since February amid bets the Federal Reserve will keep interest rates low even as it considers when to slow bond purchases.

Three-year note yields fell the most since Nov. 18 after the auction yesterday. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount offered, was 3.55, versus a 3.3 average at the past 10 sales. Data last week showing U.S. employers added more jobs than forecast in November boosted wagers the Fed may cut stimulus as soon as this month. Fed Chairman Ben S. Bernanke said last month the key interest rate will probably stay low long after bond buying ends.

“To the extent that the Fed continues to anchor the short-end, and they’ve said they’re going to keep short rates low for an extended period of time, the three-year’s more protected” than 10- and 30-year debt, said David Coard, head of fixed-income trading in New York at Williams Capital Group LP, a brokerage for institutional investors. “We’re at yields near the highs, and that may have attracted some interest.”

The current three-year note yield fell two basis points, or 0.02 percentage point, to 0.59 percent yesterday in New York after the auction, the most in three weeks, according to Bloomberg Bond Trader prices. The yield touched 0.63 percent Dec. 6, the highest since Nov. 13. The price of the 0.625 percent security due in November 2016 added 2/32, or 63 cents per $1,000 face amount, to 100 3/32. Two-year yields were little changed at 0.3 percent.

Yield Gap

The three-year note yielded 29 basis points more than the two-year yield, compared with the 2013 average of 23 basis points more.

Benchmark 10-year yields fell four basis points to 2.80 percent. They climbed on Dec. 6 to 2.93 percent, the highest level since Sept. 13, after the U.S. Labor Department said the economy added 203,000 jobs last month.

The three-year note offering drew a yield of 0.631 percent, versus 0.644 percent in November at the last sale of the security.

“The auction went pretty well,” said Thomas Simons, a government-debt economist in New York at Jefferies LLC, which as one of the Fed’s 21 primary dealers is required to bid in Treasury debt offerings. “There are expectations that the Fed is going to remain committed to low front-end rates, which has kept anchor demand, and keeping yields where they are.”

Benchmark Rate

The central bank has held its key rate at zero to 0.25 percent since 2008 to support the economy. Investors see an 11 percent chance policy makers will increase the rate to 0.5 percent or higher by January 2015, based on data compiled by Bloomberg from futures contracts.

The Fed buys $85 billion of Treasuries and mortgage bonds a month to push down borrowing costs and spur economic growth. Minutes of policy makers’ Oct. 29-30 meeting, released Nov. 20, said they expected economic data to show improvement in the labor market and “warrant trimming the pace of purchases in coming months.”

The Fed’s holdings of Treasuries totaled $2.16 trillion as of Dec. 4, while its stake in mortgage-backed securities was $1.44 trillion, according to Fed data. The Treasuries position has grown 31 percent from $1.66 trillion at the end of 2012, while home-loan debt has risen 53 percent from $941 billion during the same period.

Bidder Participation

At yesterday’s auction, indirect bidders, an investor class that includes foreign central banks, purchased 38.4 percent of the notes sold, compared with an average of 29.9 percent for the past 10 sales.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 12 percent of the notes, versus an average of 17.6 percent for the past 10 auctions.

Investors bid $2.88 for each dollar of the $1.994 trillion in U.S. government notes and bonds sold at auction this year, according to Treasury data compiled by Bloomberg. That’s down from the record $3.15 for the $2.153 trillion sold at last year’s offerings.

The Treasury will auction $21 billion in 10-year debt today and $13 billion in 30-year bonds tomorrow.

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