Treasury Auction Gets Off to a Slow Start

Investors were reluctant to bid on the first leg of this week’s record $32.25-billion auction of new U.S. government securities, and those that won the bidding Tuesday quickly regretted the decision.

By the time the results of Tuesday’s $11.5-billion auction of three-year notes were announced at 3 p.m. EDT, rapidly unwinding developments in the Middle East conflict again battered the entire Treasury market and pushed yields on the new notes sharply above the auction level.

“The owners of the three-year note are now deep under water,” said economist Brian Fabbri of Midland Montagu.

Analysts said the deterioration of the note following the auction does not bode well for the upcoming auctions of 10-year notes today and 30-year bonds Thursday.

Part of the reason for Tuesday’s mediocre bidding was fewer Japanese investors. The Japanese bought about 20% of the notes auctioned, Japanese primary dealers said. That was below analyst expectations.

The three-year note was widely expected to be the star of the third-quarter Treasury refunding. Economists reasoned that with inflation worries wreaking havoc in the long-end, and expections the Federal Reserve will ease interest rates to avert recession, short-term notes are a good bet.

That reasoning, they concede, did not pan out.

“There just appears to be too much uncertainty for people to be bidding on anything,” said economist Ward McCarthy, a partner at Stone and McCarthy Research Associates Inc. in Princeton, N.J.