U.S. Sells 10-Year Notes at 3% Level First Time Since 2011

The U.S. sale of $21 billion in 10-year notes drew the highest yield at an auction of the security in two-and-a-half years as investors bet improving economic data may accelerate the Federal Reserve’s pace of stimulus cuts.

The 3.009 percent yield at the auction was the highest since the Treasury sold $24 billion of the securities at 3.210 percent in May 2011. The forecast was for a yield of 3.004 percent, according to the average estimate in a Bloomberg News survey of seven of the Fed’s 21 primary dealers. The 10-year sale follows the Treasury’s auction of $30 billion of three-year notes yesterday that drew the highest yield since September and the lowest level of demand since October.

“The auction was probably less attractive because we’re still trying to gauge the tapering of quantitative easing,” William Larkin, a fixed-income portfolio manager who helps oversee $500 million at Cabot Money Management Inc., said in a telephone interview from Salem, Massachusetts. The Fed “is the biggest buyer. The market needs a little bit more information.”

The current 10-year note yield rose six basis points, or 0.06 percentage point, to 3 percent at 2:26 p.m. New York time, according to Bloomberg Bond Trader prices. The 2.75 percent note due in November 2023 fell 15/32, or $4.38 per $1,000 face amount, to 97 29/32. The yield climbed to 3.05 percent on Jan. 2, the highest since July 2011.

Demand Levels

The auction’s bid-to-cover ratio, which gauges demand by comparing total bids with the amount offered, was 2.68. That compared with a ratio of 2.61 at the December auction of the maturity and an average of 2.7 at the past 10 offerings.

Indirect bidders, a class of investors that includes foreign central banks, bought 46.6 percent of the notes, compared with 48.9 percent at last month’s sale. Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 13.6 percent compared with 10.6 percent last month that was the least since August 2012.

“The economy is improving and we’ll probably be talking in a month or so about increasing the pace of tapering,” said James Collins, an interest-rate strategist in the futures group in Chicago at Citigroup Inc., a primary dealer. “We’re going to be looking at softer prices.”

Fed policy makers saw diminishing economic benefits from the central bank’s bond buying program and expressed concern about risks to financial stability, according to minutes of their last meeting, when they took the first step to cut the pace of purchases.

New Cash

“A majority of participants judged that the marginal efficacy of purchases was likely declining as purchases continue,” the record of the Federal Open Market Committee’s Dec. 17-18 meeting showed.

The minutes didn’t describe a set schedule for the pace of asset-purchase reductions, while “a few” officials mentioned the need for a “more deterministic path.”

The projected ramp-up in tapering also drove yields higher at the three-year auction yesterday. The securities drew a yield of 0.799 percent, compared with the average forecast of 0.797 percent in a Bloomberg News survey of six of the Fed’s primary dealers. That compared with 0.631 percent in December at the last offering of the security.

The bid-to-cover ratio in the three-year auction was 3.25, the lowest since October and versus an average of 3.30 at the previous 10 sales.

Treasury will offer $13 billion of 30-year securities tomorrow to complete this week’s $64 billion in note and bond auctions.

The sales will raise $4.8 billion of new cash, as maturing debt held by the public totals $59.2 billion, according to the U.S. Treasury.

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