Small Investors, Japanese Snap Up Treasury Offerings

Fueled by surprisingly strong bids from Japanese and small investors, the Treasury Department successfully completed the first leg of its quarterly debt auction Tuesday at lower-than-expected interest rates. The $10.5-billion sale of three-year notes set a positive tone for the more sensitive long-term offerings today and Thursday, bond traders said.

The auction also bolstered the position of some market analysts and traders who have suggested that interest rates are near a short-term peak, and stock prices gained in response to the news. After a mostly uneventful session Tuesday, the Dow Jones industrial average rose in the final minutes of trading, closing at 2,733.56, up 11.94.

“This (bond) issue went extremely well,” said Al R. McClymonds, co-manager of the government desk at First Boston Corp. in New York.

The offering of three-year notes sold at an average yield of 8.74%, the Treasury said. Only 13% of the offering went out at the slightly higher yield of 8.75%.

In the second and third days of the record $30.5-billion auction, the Treasury plans to sell $10 billion in 10-year notes late today and an additional $10 billion in 30-year bonds on Thursday.

Last week, industry experts had been speculating that the government would be forced to issue the debt at an average yield of 9% or more because of continuing inflation fears.

However, inflation worries cooled last Friday when the Labor Department announced that the U.S. economy created virtually no jobs in April and the unemployment rate had jumped to 5.4%. That caused an immediate drop in bond yields and set the stage for Tuesday’s offering, traders said.

“Three days ago, everybody thought this bond offering was going to be a disaster because the consensus view was interest rates were going up,” said Michael Metz, market strategist at Oppenheimer & Co. “But now the psychology has changed. The (stock) market reacted with growing optimism that the balance of this offering is going to be a great success.”

The biggest surprise of the auction was the interest of small investors, who snapped up a whopping $2.4 billion in notes, or roughly 23% of the offering. That was the highest percentage sold to small investors in at least the past decade, according to traders at Bank of America.

Typically, small investors will buy between 10% and 15% of a Treasury auction, said Elias Bikhazi, vice president and money market economist at Security Pacific Corp.

“There is a feeling that interest rates may be peaking, and (small investors) want to take advantage of that,” Bikhazi said.

Moreover, with corporate earnings reports continuing their disappointing trend, investors may be shifting some of their investment dollars out of the stock market into relatively safer government securities.

“Given the estimated yields in the stock market right now, an 8.74% yield on Treasuries looks pretty attractive,” said McClymonds. “Money that normally would be invested in the stock market is being shifted into bonds.”

Meanwhile, investor fears about the Japanese dropping out of the U.S. debt market also proved unfounded. The Japanese typically buy between 25% and 30% of Treasury offerings, industry experts said. However, some feared that Japanese banks and insurance companies, traditionally large buyers of U.S. debt securities, would fail to show up for this week’s auctions because of the losses they suffered recently in the Tokyo stock market.

However, McClymonds maintains that the Japanese bought at least 25% of Tuesday’s offering. And industry experts believe that they will bid more heavily for the 10- and 30-year bonds.

“They (the Japanese) were in at moderate levels today,” Bikhazi said. “But they tend to be more heavily weighted in the longer-term paper.”

Foreign buying will be important for the balance of the Treasury auctions, these experts said, because long-term issues are typically harder to sell.

“Once you get into the longer-term issues, you are buying more volatility and risk,” said Robert DiClemente, director of research at Salomon Bros. in New York. “Those auctions will be a better test of true market sentiment.”