U.S. Sells 3-year notes at record low yield

The Treasury sold $32 billion of three-year notes at a record low yield as concern Greece is moving closer to default bolstered the refuge appeal of government debt.

Yields on benchmark 10-year yields fluctuated after reaching an all-time low when an adviser to Germany’s Chancellor Angela Merkel said today that decisions taken in July by European leaders “won’t suffice” to save Greece from missing a payment on its debt. The bid-to-cover ratio at the auction, which gauges demand by comparing total bids with the amount of securities offered, was 3.15, compared with an average of 3.18 for the past 10 sales of three-year notes.

“It’s a good auction,” said Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc., one of 20 primary dealers that trade directly with the Fed. “It seems like there’s another shoe that drops with Europe every day, so it’s a constant concern in the U.S. marketplace.”

Yields on 10-year notes rose less than one basis point, or 0.01 percentage point, to 1.93 percent at 1:17 p.m. in New York, according to Bloomberg Bond Trader prices. The 2.125 percent securities maturing in August 2021 dropped 2/32, or 63 cents per $1,000 face amount, to 101 26/32. The yields earlier touched 1.8770 percent, the lowest on record in Federal Reserve data beginning 1953.

The current three-year note increased four basis points to 0.33 percent. The yield on 30-year bonds dropped one basis point to 3.24 percent.

Indirect Bidders

Indirect bidders, an investor class that includes foreign central banks, purchased 35.7 percent of the notes, compared with 47.9 percent at the August sale of the notes and an average of 35.8 percent for the past 10 offerings.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 10.6 percent of the securities, compared with an average of 13.2 percent for the past 10 auctions.

The offering is the first of three note and bond auctions this week totaling $66 billion. The Treasury is scheduled to sell $21 billion in 10-year debt tomorrow and $13 billion of 30-year bonds on Sept. 14.

The entire amount raised this week is new cash, with none of the proceeds dedicated to redeeming maturing securities, according to the Treasury Department.

Germany’s Concern

Treasuries rose earlier today as Lars Feld, an economic adviser to Merkel, said today decisions taken in July by European leaders “won’t suffice” to save Greece from missing a payment on its debt.

“There’s this ever-present flight-to-quality bid out there,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors. “We’ve moved powerfully.”

Germany’s government is discussing how to strengthen the nation’s banks in case Greece fails to meet the budget-cutting terms of its aid package and is unable to get a bailout-loan payment, officials said Sept. 9.

A haircut in the order of 50 percent will be necessary on Greek debt, and it’s better to go ahead “rather now than later,” Feld said today in an interview with Maryam Nemazee on Bloomberg Television’s “The Pulse.”

Merkel and European Commission President Jose Barroso agreed on the “paramount” importance of the euro, the German government said after the two met in Berlin today.

Treasuries have underperformed bunds, with the extra yield investors get to hold 10-year U.S. notes instead of their German counterparts increasing to 19 basis points, the widest spread since Aug. 5.

Relative Strength

The seven-day relative strength index for the 10-year note yield was below 30 for a second day. A reading less than that level indicates a security may be poised for a change in direction. The index was at 30.838 today.

Returns on inflation-linked bonds fell below those of government debt by the most in almost three years as a world economic slump makes it less likely that easy monetary policies will trigger spiraling consumer prices.

Global sovereign debt gains are 1.3 percentage points higher since the end of July than on so-called linkers according to Bank of America Corp. The difference is the most since November 2008. The gap in yields for these bonds on Sept. 9 indicated investors anticipated an annual global inflation rate of 1.35 percent, down from 1.86 percent four months earlier.

“The inflation-linked debt market is confirming signals from pretty much all other capital markets about concerns over the outlook for European and U.S. economic growth,” Jack Malvey, chief global markets strategist at Bank of New York Mellon Corp., said in an interview on Sept. 8. “The concerns which the market generally shared over the first half of 2011 about the potential resurrection of inflation in so-called advanced economies have subsided.”