With the three-year part of the curve perceived to be cheap going into yesterday’s auction, it was a good bet that the first of this weeks US auction would be well received. Treasuries prices have rallied as the three-year notes attracted the highest demand on record, boosted by investors seeking a refuge from Europe’s sovereign debt problems.
The $32b sale drew a yield of +0.379%, compared with a forecast of +0.393%. The bid-to-cover ratio was 3.41 (the most in 18-years). Indirect bidders purchased +38.7% of the notes, compared with an average of +35.9% for the past 10-sales. Direct bidders purchased +19.9% of the notes compared with an average of +11.8%. The strong interest has been fueled by year end demand and the continued global economic concerns.
Investors note that the Fed is having no problem finding demand for its short-term bonds as it focuses further out the curve. This is a sign that the strength in the economy seen last month may be ‘short’ lived. Growing demand for shorter-maturity suggests that investors remain concerned that EU sovereign debt crisis may worsen and this despite last month’s US indicators revealing something different.
The bids suggest that government borrowing costs may stay at about record lows while the US ramps up borrowing to finance that mounting deficit. Even with “Operation Twist†successfully flattening the curve,†it has not caused a sell off in the shorter maturities the Fed has been disposing of and supports the bullish trend. The big question will be what happens in the rest of the week’s auctions. Today we get +$24b of 10’s and +$16b of longs tomorrow.
U.S. Ten-Years:
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