With the three-year part of the curve perceived to be cheap going into yesterdayÃ¢â‚¬â„¢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 EuropeÃ¢â‚¬â„¢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 Ã¢â‚¬ËœshortÃ¢â‚¬â„¢ lived. Growing demand for shorter-maturity suggests that investors remain concerned that EU sovereign debt crisis may worsen and this despite last monthÃ¢â‚¬â„¢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 Ã¢â‚¬Å“Operation TwistÃ¢â‚¬Â successfully flattening the curve,Ã¢â‚¬Â 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 weekÃ¢â‚¬â„¢s auctions. Today we get +$24b of 10Ã¢â‚¬â„¢s and +$16b of longs tomorrow.
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