U.S. 3-Year Sale Draws Above-Average Bids, Yields Most Since ’11Cordell Eddings
Treasury’s sale of $27 billion in three-year notes drew above-average demand at the highest auction yield since May 2011 amid speculation the Federal Reserve may raise its interest-rate target next year.
The securities produced a yield of 0.992 percent yesterday, compared with a forecast of 0.998 percent in a Bloomberg News survey of nine of the Federal Reserve’s 22 primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.38, versus an average of 3.34 for the past 10 sales.
“Demand was pretty healthy across the board,” Stanley Sun, a New York-based strategist at Nomura Holdings Inc., a primary dealer, said yersterday in a telephone interview. Given “that everyone is looking for Fed to move up rate-hike expectations, that the auction was as strong as it was speaks volumes about the demand from the underlying buyer.”
The current three-year note yield fell two basis points, or 0.02 percentage point, to 0.95 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. The yield touched 0.99 percent on June 18, the highest level since May 2011. The yield on the benchmark 10-year note dropped six basis points to 2.56 percent.
Indirect bidders, an investor class that includes foreign central banks, purchased 38.2 percent of the notes sold today, the highest level since February, compared with an average of 32.1 percent at the past 10 sales.
Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 12.7 percent of the notes, the least since December, versus an average of 19.4 percent at the past 10 auctions.
The size of the three-year offering was reduced by $1 billion from the last sale, the third consecutive cut.
The U.S. plans to sell $21 billion of 10-year notes today and $13 billion of 30-year bonds tomorrow. The sales will raise $5.1 billion of new cash, as maturing securities held by the public total $55.9 billion, according to the U.S. Treasury.
Three-year notes have returned 0.4 percent this year, compared with a gain of 2.6 percent by the broader Treasuries market, according to Bank of America Merrill Lynch indexes. The three-year securities lost 0.1 percent in 2013, while Treasuries overall fell 3.4 percent.
Shorter-maturity debt tends to track what the Fed does with its benchmark rate, while longer-term securities are more influenced by the outlook for inflation.
The Fed is tapering its monthly asset purchases, while keeping the target for overnight lending between banks in a range of zero to 0.25 percent. The central bank is scheduled to publish the minutes of its June 17-18 Federal Open Market Committee meeting tomorrow.
“The front end has been under-performing, and it’s catching up slowly,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “We have the FOMC minutes tomorrow and it will be interesting to see if we get any additional insight.”
Traders see a 77 percent chance that officials will raise the key rate by September 2015, fed funds futures contracts show. Fed policy makers said after their June 18 meeting that it will keep the benchmark interest rate at almost zero for a “considerable time” after its bond-buying program ends, likely later this year.