Strong Demand at Auction Drives Down Treasury Rates

The Treasury sold $12.65 billion of three-year notes at an average yield of 6.98% on Tuesday as strong investor demand drove interest rates for the three-year government IOUs to their lowest level in four years.

“We were expecting a strong auction, but this was better than expected,” said Lawrence Leuzzi, managing director at S. G. Warburg & Co. in New York.

Michael A. Rosen, a vice president at First Interstate Bank in Los Angeles, added: “A lot of people wanted to lock in today’s yields on the anticipation that rates will continue to fall in the weeks and months ahead.”

The 6.98% yield is down from 7.78% at the previous three-year note auction on Nov. 6 and is the lowest yield since the notes sold at 6.54% on Feb. 3, 1987.

Tuesday’s auction was the first leg of the Treasury’s record $34.5-billion quarterly refunding. Ten-year notes will be sold today and 30-year bonds will be sold Thursday.

Traders said early indications point to strong demand for the longer-term issues too. Trading on a when-issued basis, yields on 30-year bonds that will be issued on Thursday dipped just below the psychologically important 8% level before closing at 8%.

Trading in the existing benchmark 30-year bond, which bears an 8.75% coupon and is due in August, 2020, drove the yield down to 8.0002% at one point Tuesday, but when trading ended the yield was up to 8.03%.