U.S. 3-Year Sale Draws Lower-Than-Average Demand Before Fed

A U.S. auction of $30 billion of three-year notes attracted lower-than-average demand, with primary dealers taking down the largest share at a sale of the securities since June.

The notes sold yesterday yielded 0.802 percent, the highest at an auction of the securities since the September sale. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount offered, was 3.25, compared with 3.42 last month. The average at the past 10 offerings was 3.29. Primary dealers purchased 54.6 percent of the sale, the most in nine months, as investors speculate whether Federal Reserve may revise forward guidance at a meeting next week.

“People are tired of buying the front end, waiting for the Fed to move,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee. “As you get closer to what could be new thoughts on forward guidance you would back off from the three-year a little bit. This is the one opportunity to back away before the Fed meets next week.”

The current three-year note yield was little changed at 0.76 percent at 5 p.m. in New York yesterday, according to Bloomberg Bond Trader prices. The price of the 0.625 percent security due in February 2017 was 99 19/32.

Yields on benchmark 10-year notes fell one basis point, or 0.01 percentage point, to 2.77 percent.

Indirect Bidders

The yield at yesterday’s sale compared with a forecast of 0.803 percent in a Bloomberg News survey of eight of the Fed’s 22 primary dealers.

Indirect bidders, an investor class that includes foreign central banks, purchased 29.9 percent of the notes, compared with 42 percent last month that was the most since August 2011. The average for the past 10 sales is 35 percent.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 15.5 percent at the sale, compared with 16.6 percent last month and an average of 16 percent at the past 10 offerings.

The butterfly-index spread, which measures how current three-year Treasuries are performing against two- and five-year securities, was close to the cheapest level in two weeks at negative 47 basis points. It reached negative 42 basis points on Jan. 22, the cheapest level this year, and was at negative 67 basis points on Jan. 2, the most expensive since October 2008. A negative figure signals investors are more bullish on the middle security, making it relatively expensive versus the others.

Forward Guidance

Investors have speculated that the Fed may revise forward guidance as improving economic data may show the U.S. economy is resilient after harsh winter weather depressed activity.

At its last meeting, the Fed left unchanged its statement that it will probably hold its target interest rate near zero “well past the time” that unemployment falls below 6.5 percent, “especially if projected inflation” remains below its longer-run goal of 2 percent. The target rate has remained unchanged at zero to 0.25 percent since December 2008.

A report last week showed U.S. non-farm payrolls in February increased 175,000, following a revised 129,000 gain the prior month that was bigger than initially estimated, Labor Department data showed March 7.

The jobless rate rose to 6.7 percent, from 6.6 percent, as more people entered the labor force and couldn’t find work. A separate report March 3 showed the Fed’s preferred inflation measure, the personal consumption expenditure index, rose 1.2 percent in January from a year ago, below the central bank’s 2 percent target.

Next Auctions

Yesterday’s three-year note sale was the sixth consecutive $30 billion offering of the maturity, matching the lowest amount sold since January 2009. The size had been $32 billion from October 2010 through August 2013 before being cut to $31 billion in September. It peaked at $40 billion from November 2009 through April 2010.

Three-year notes have returned 0.3 percent this year, compared with a gain of 1.3 percent by the broader Treasuries market, according to Bank of America Merrill Lynch indexes. The three-year securities declined 0.1 percent in 2013, while Treasuries overall fell 3.4 percent.

Today’s offering was the first of three note and bond auctions this week totaling $64 billion. The government will sell $21 billion in 10-year debt tomorrow and $13 billion in 30-year securities on March 13.

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