Treasuries declined after the government’s sale of $32 billion in three-year debt, the first of three offerings this week of $66 billion in notes and bonds, attracted weaker demand than at past auctions.
The securities drew a record-low yield of 0.569 percent, compared with the 0.562 percent average forecast in a Bloomberg News survey of 7 of the 18 primary dealers obligated to participate in government auctions. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.95, compared with 3.21 in the previous auction and an average of 3.12 at the past 10. The Fed will release minutes of its September meeting at 2 p.m.
“A weaker-than-expected auction and the uncertainty about how much quantitative easing is in the market is weighing on Treasuries,” said Suvrat Prakash, an interest-rate strategist in New York at BNP Paribas Securities Corp., one of the 18 primary dealers required to bid at Treasury auctions.
The yield on the current three-year note increased three basis points, or 0.03 percentage point, to 0.55 percent at 1:17 p.m. in New York, according to BGCantor Market Data. The benchmark 10-year note yield was little changed at 2.39 percent. Thirty-year bond yields were up two basis points to 3.76 percent.
Indirect bidders, an investor class that includes foreign central banks, purchased 29 percent of the three-year notes at today’s sale, compared with 42.4 percent at the previous auction on Sept. 7 and an average of 47.5 percent for the past 10 sales.
Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 11.9 percent, compared with 11.7 percent of the securities at the prior sale and an average of 13.2 percent for the past 10 auctions.
The securities drew a then-record yield of 0.79 percent at the September auction.
Three-year notes have returned 5.1 percent this year, compared with a 9.3 percent gain for the broader Treasury market, according to Bank of America Merrill Lynch indexes.
Today’s auction is the sixth consecutive three-year offering in which the size was reduced. The government will sell $21 billion of 10-year debt tomorrow and $13 billion of 30-year bonds on Oct. 14.
The 10-year note yield will increase to 2.65 percent in the fourth quarter, according to the median forecast of 67 analysts in a Bloomberg News survey. The two-year note yield is expected to rise to 0.60 percent, another survey showed. It touched the all-time low of 0.327 percent today.
Minutes of the last policy meeting of the Federal Open Market Committee are scheduled to be released at 2 p.m.
Treasuries rallied on Sept. 21, when FOMC said in a statement following the meeting that it’s prepared “to provide additional accommodation if needed to support economic recovery and to return inflation, over time, to levels consistent with its mandate.”
The difference between yields on 30-year bonds and Treasury Inflation Protected Securities narrowed for the first time since Sept. 30. The break-even rate, a measure of inflation expectations over the life of the maturity, slid 0.07 percentage point to 2.27 percentage points.
Reports this week are forecast in Bloomberg News surveys to show producer and consumer prices remained benign in September, according to economists surveyed by Bloomberg.
The auctions and this week’s data “are mere speed bumps on the road as we hurdle inexorably toward the Nov. 3 FOMC meeting and a second round of large-scale asset purchases by the Fed,” William O’Donnell, head of U.S. government bond strategy at primary dealer Royal Bank of Scotland Group Plc in Stamford, Connecticut, wrote in a note to clients.
Janet Yellen, in her first public remarks as the Fed vice chairman, said low interest rates may give firms the incentive to engage in excessive risk-taking.
“It is conceivable that accommodative monetary policy could provide tinder for a buildup of leverage and excessive risk-taking in the financial system,” she said in a speech yesterday in Denver.
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