Dealers Cautious on Last Day of Auction

The last leg of the Treasury’s quarterly auction of $30 billion in new securities brought lukewarm response from investors Thursday, but was not as weak as some had feared.

The sale of $10 billion of 30-year bonds capped a three-day auction that was generally well-received and helped ease concerns that Japanese investors would abandon the U.S. market.

The closely watched quarterly sales allow the government to cover its borrowing needs by attracting capital from domestic and foreign investors, especially the Japanese, to help fund the massive U.S. budget deficit.

Thursday’s auction brought an average yield of 8.50%, up from 7.87% at the last auction in November. The yield was the highest since 9.11% last May.

Bidding was much more restrained than in the first two legs, which each sold $10 billion of shorter-term notes.

“It was weak, but it was a smart auction,” said Joseph Plocek, chief economist at McCarthy, Crisanti & Maffei Inc. “Under the circumstances, which was uncertainty about Japanese participation, dealers bid cautiously.”

Though the cautious bidding made it difficult to gauge, dealers estimated that Japanese investors bought nearly 30% of the bonds sold, about their usual amount.

“The Japanese certainly didn’t desert the U.S. market,” said Mel Swanborn, trading manager at Yamaichi International America Inc.

Japanese buying at all three auctions laid to rest fears that foreign investors had given up on the U.S. markets because of climbing interest rates abroad.

The open market yield on the long bond dropped one-tenth of a percentage point during the course of the three-day auction, a sign of the relatively strong demand for the government’s paper. As bond prices rise, their yields fall.

In the auction, the yields at which bids were accepted ranged up to 8.53%, showing that some participants did not bid aggressively. If they had, bids would have been tight near the low end of the range, around 8.48% on Thursday, to entice the government to accept.

The government wants bids with the lowest yields to save on interest costs.

Thursday’s action stood in stark contrast to the first two days, when investors bid hungrily for the government securities. There had been worries that bidding would be soft, particularly from Japanese investors, whose money has in effect served to subsidize the mammoth U.S. budget deficit.

On Thursday, Japanese bidders bought nearly 30% of the bonds sold, down slightly from the first two legs, when they were said to have bought 35% to 40%.

The three-year note sale on Tuesday was best attended, attracting a high level of bidding and averaging 8.43%. The 10-year note sale on Wednesday garnered an 8.59% yield in another tightly bid auction.