With yields up, buyers jump at Treasury’s new 3-year notes

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The latest run-up in Treasury bond yields brought investors off the sidelines at today’s government auction of three-year securities.

The Treasury said it sold $35 billion of three-year notes at an annualized yield of 1.96%, slightly below expectations.

‘There was very, very good demand at that price,’ said Brian Edmonds, head of interest rates at bond dealer Cantor Fitzgerald in New York. Bids totaled $99 billion for the notes, the Treasury said.

Yields on shorter-term Treasuries have pulled back across the board today, after surging Friday and Monday.

The government’s report Friday that the economy lost a net 345,000 jobs in May -- far fewer than expected -- helped trigger selling in the Treasury market, as some traders and investors feared the Federal Reserve might be forced to begin raising short-term interest rates this fall.

That still seems absurd, given the likelihood that the economy will continue to struggle even if the recession ends. But when enough traders get caught with too many bonds a selling panic can ensue.

The yield on outstanding three-year T-notes had soared from 1.44% on Wednesday to 1.96% by Monday as sellers swarmed.

The two-year T-note yield, which jumped from 0.91% Wednesday to 1.39% by Monday, has slipped to 1.32% today as the market has calmed down a bit.

But longer-term yields are modestly higher as the market gets ready for the Treasury’s sale of $19 billion of 10-year notes on Wednesday and $11 billion of 30-year bonds on Thursday -- more borrowing to fund the ballooning federal deficit.

The 10-year T-note yield, a benchmark for mortgage rates, is at a new seven-month high of 3.89% today, up from 3.88% on Monday.

-- Tom Petruno