U.S. 3-Year Auction Attracts Most Non-Dealer Bids in Six Months

The U.S. sale of $27 billion of three-year notes attracted the most demand since February from beyond the bond dealers obligated to bid at government auctions with investors comfortable with the outlook for interest rates.

Investors known as direct and indirect bidders bought 55.2 percent of the securities sold yesterday, with both groups winning above-average allotments of the debt. The notes were sold at a yield of 0.924 percent, compared with a forecast of 0.925 percent in a Bloomberg News survey of six of the Federal Reserve’s 22 primary dealers. That was the lowest since the monthly auction in April.

“The auction went well,” said Gabriel Mann, a U.S. government bond strategist at RBS Securities Inc. in Stamford, Connecticut, a primary dealer. “Guys are thinking the Fed is determined to keep the pace of the exit strategy slow and steady.”

The likelihood the central bank will boost its benchmark overnight rate from a range of zero to 0.25 percent for the first time since 2008 is about 40 percent for June, down from 51 percent on July 30, futures prices show.

Indirect bidders, a class of investors that includes foreign central banks, bought 36.2 percent of the notes, versus an average of 32.6 percent for the past 10 sales.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 19 percent of the offering, compared with 12.7 percent at the last sale an an average of 18.6 percent over the previous 10 auctions.

Note Returns

The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.03, and lowest since June 2013. The average is 3.35 for the past 10 sales.

Three-year notes have returned 0.8 percent this year, compared with a gain of 3.7 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.

The government will sell $24 billion in 10-year securities today and $16 billion in 30-year debt tomorrow. The sales will raise $9.3 billion of new cash, as maturing securities held by the public total $57.7 billion, according to the U.S. Treasury.

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