Monday's US three-year Treasury note auction should fetch solid demand from investors, marking a strong start for the government's record $81 billion November refunding. The Federal Reserve's pledge to keep policy rates near zero and a disappointing October payrolls report make short-dated Treasuries a better investment than longer-dated government securities, analysts said on Friday.
For those willing to take on a bit more risk, three-year Treasury notes offer a rather hefty 0.5 percentage point in additional yield than two-year notes, they noted. After a record $40 billion three-year offering, the US Treasury Department will sell $25 billion in benchmark 10-year notes on Tuesday and $16 billion in 30-year bonds on Thursday. Demand for government debt has remained strong, despite anxiety over a burgeoning federal deficit on the government's credit-worthiness and the reserve status of the US dollar.
Monday's three-year note auction is $15 billion more than the one last November when the maturity was reintroduced. The steady monthly increase in three-year debt offering has not turned off buyers, analysts and investors said.
In the "when-issued" market, traders were expecting the new three-year note to yield 1.425 percent late Friday, compared with a 1.367 percent yield on most recent three-year Treasuries trading in the open market. It is unclear whether strong results at Monday's three-year auction will carry over to the other two legs of the November refunding, analysts said.
This week, long-dated Treasury yields rose on worries among some traders that the Fed's ultra-loose policy will backfire and cause inflation to roar back once an economic recovery stays on track. Some analysts reckon current 10-year and 30-year yields should entice bargain-minded investors who believe this week's sell-off in long-dated Treasuries is overdone given the weak economic backdrop. The yield on benchmark 10-year notes was 3.50 percent late Friday, down 2 basis points from late Thursday.
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