Notes Draw Higher Rates Than Expected : Securities: Analysts blame confusion over the direction of Fed policy.

The Treasury Department sold $15 billion worth of three-year notes Tuesday at an average yield of 5.54%, the lowest rate since the government began selling the notes 17 years ago.

But the low rate was still higher than many bond market experts had predicted, showing that the Treasury had a hard time getting people to buy the notes.

They were sold in the first leg of the $36-billion Treasury refunding, a three-step auction that raises money to pay off maturing debt and finance the federal deficit each quarter.

Analysts said the notes got a poor reception because of confusion over the direction of short-term interest rates. Uncertain whether rates are headed lower, traders backed off from the issue.

In a Treasury auction, investors offer to buy U.S. paper with a certain yield, giving the government money in return for fixed-interest rate payments over a number of years. When the paper matures, investors--who can also trade the issues in the bond market--get their principal back.

The government, seeking to keep down interest payments, picks bids with the lowest yield. The slightly higher-than-expected average yield showed that investors were cautious about the issue.

Analysts said confusion over Federal Reserve policy was the main reason for the half-hearted reception.

Fed Chairman Alan Greenspan hammered home Tuesday that he believed that interest rates were low enough to get the economy moving again. He added that the Fed stood ready to ease if needed.

“We believe the amount of monetary ease now in the pipeline is adequate to return the economy onto a path of sustained recovery,” he said.

Although he said much the same thing last week, his statement Tuesday came after unexpectedly weak employment data Friday. A 91,000 drop in January payrolls and a stubbornly high 7.1% unemployment rate revived hopes that the Fed might lower interest rates.

“People were uncomfortable betting against the Fed,” said Mike Strauss, economist at UBS Securities.

The Treasury assigned a 5.5% coupon to the three-year notes, sold at an average price of 99.891% of their face value.

The average yield was down from 6% at the three-year note auction Nov. 5, 1991, and was the lowest since the Treasury began auctioning three-year notes on a regular basis in November, 1974.

Following Greenspan’s remarks, prices of U.S. Treasury bills softened, and interest rates rose. By the end of the day, the benchmark 30-year U.S. Treasury bond ended slightly lower, with its yield unchanged at 7.79%.

As part of the quarterly auction, the Treasury will sell $11 billion in 10-year notes today and $10 billion in 30-year bonds Thursday.

The Treasury said $29.425 billion in bids was received, including $839 million in non-competitive bids from the public.

The notes sold Tuesday will be issued Feb. 18 and mature Feb. 15, 1995.