U.S. 3-Year Note Sale Draws Lowest Yield Since April

The U.S. auction of $27 billion of three-year notes drew the lowest yield since April as speculation that turmoil in Ukraine and Iraq may worsen fueled investor demand for safety.

The 22 primary dealers that underwrite U.S. debt sales purchased 44.8 percent of the notes, the least since February, as investors in a category that includes pension funds and insurers bought the most since June. The yield was 0.924 percent, below the current debt’s 2.1 percent average yield over the past decade. Ten- and 30-year Treasuries fell before the U.S. auctions $40 billion of the securities this week.

“You’ll see a lot of demand stemming from geopolitical events,” said Aaron Kohli, an interest-rate strategist at BNP Paribas SA in New York, a primary dealer. “Investors are worried about the instability.”

Yields on current three-year notes were little changed at

0.89 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. They increased earlier by one basis point, or 0.01 percentage point, to 0.90 percent. The price of the

0.875 percent debt due July 2017 was 99 30/32.

The benchmark U.S. 10-year note yield rose two basis points to 2.45. Thirty-year bond yields advanced three basis points to

3.28 percent.

The amount of Treasuries traded through ICAP Plc, the largest inter-dealer broker of U.S. government debt, increased to $264 billion, from $195 billion yesterday. The average daily volume this year is $326 billion. It reached $504 billion on Aug. 1, the highest level in three months, and fell on Aug. 4 to $197 billion.

Iraq, Ukraine

Bonds jumped last week as unrest in Ukraine, Iraq and Gaza boosted haven demand.

Ukraine refused today to let a convoy that Russia says is loaded with humanitarian aid enter the country, arguing the mission doesn’t adhere to international rules and must be led by the Red Cross. The trucks are carrying military gear in the guise of aid, Ukrainian military spokesman Andriy Lysenko said.

Iraq Prime Minister Nouri al-Maliki met with military officers today in the latest sign he won’t hand power willingly to his designated successor.

A Bloomberg News survey of six primary dealers forecast that the notes sold today would yield 0.925 percent. The yield at the last auction, on July 8, was 0.992 percent, the highest since May 2011.

Bidder Participation

Direct bidders, non-primary-dealer investors including pension funds and insurance companies that place their bids directly with the Treasury, bought 19 percent of the notes sold today. That compared with 12.7 percent at the last sale and an average of 18.6 percent at the past 10 offerings.

Indirect bidders, a group of investors that include foreign central banks, purchased 36.2 percent of the notes, versus an average of 32.6 percent at the past 10 sales.

The auction drew bids for 3.03 times the amount offered, versus an average of 3.35 at the past 10 sales.

The offering was tempered by speculation the Federal Reserve will raise interest rates next year as the U.S. economy improves. There’s an 85 percent chance the central bank will increase the benchmark rate target to at least 0.5 percent by the end of 2015, futures trading shows. The target has been held in a range of zero to 0.25 percent since 2008.

“As we start looking to Fed rate hikes, forecasting the third quarter or fourth quarter next year, that sector is going to be most vulnerable to higher rates,” Justin Lederer, an interest-rate strategist at the primary dealer Cantor Fitzgerald LP, said before the auction.

Investor Appetite

The Treasury will sell $24 billion in 10-year notes tomorrow and $16 billion in 30-year bonds Aug. 14.

This week’s auctions will show the extent of investor appetite for U.S. government debt amid signs the economy is strengthening. Growth rebounded last quarter from the biggest contraction in five years, the Commerce Department reported last month.

Job openings in the U.S. rose in June to 4.67 million, the most since 2001, Labor Department data showed today, and a report tomorrow is forecast to show that retail sales increased for a sixth month.

“The long end has been bulletproof,” said Thomas Simons, a government-debt economist in New York at the primary dealer Jefferies LLC. “There are buyers of duration regardless of sentiment toward the Fed or the economy.”

The U.S. budget deficit this fiscal year is 24 percent narrower than it was a year ago as a stronger economy helps revenue advance almost seven times faster than spending, a government report showed.

The $460.5 billion shortfall from October through July compared with a $607.4 billion gap in the same period a year earlier, the Treasury Department said today in Washington. Last month the government posted a $94.6 billion deficit, $3 billion less than the imbalance in July 2013, figures also showed.

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