Treasuries fall as 3-year yield exceeds forecast on election day

Treasury 10-year notes fell for the first time in three days as a U.S. sale of $32 billion of three- year debt drew lower-than-average demand while investors awaited the outcome of the presidential election.

Longer maturities led the decline as U.S. voters head to the polls to decide whether President Barack Obama or challenger Mitt Romney will face the job of avoiding the so-called fiscal cliff of $607 billion in spending cuts and tax increases scheduled to take effect in January. The yield at the note sale, the first of three auctions this week totaling $72 billion, exceeded dealers’ forecasts.

“There is a great deal of uncertainty associated with the election, and more importantly, the ramifications for the fiscal cliff,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “The auction was pretty average.”

The benchmark 10-year yield climbed five basis points, or 0.05 percentage point, to 1.70 percent at 2:58 p.m. New York time, according to Bloomberg Bond Trader prices. The 1.625 percent note due in August 2022 fell 15/32, or $4.69 per $1,000 face amount, to 98 31/32.

The yield on the current three-year note rose two basis points to 0.395 percent.

Bid Detail

The three-year notes yielded 0.392 percent at the auction, compared with a forecast of 0.383 percent in a Bloomberg News survey of nine of the Fed’s 21 primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.41, the least since April and compared with an average of 3.59 for the past 10 sales.

Indirect bidders, an investor class that includes foreign central banks, purchased 25.1 percent of the notes, the lowest since May 2007 and compared with an average of 32.9 percent for the past 10 sales.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 22.3 percent of the notes at the sale, the second most since January, 2010, compared with an average of 10.8 percent for the past 10 auctions.

Three-year notes have returned 0.4 percent this year, compared with a 2.1 percent return for Treasuries overall, according to Bank of America Merrill Lynch indexes.

The auction was “very average,” Brett Rose, an interest- rate strategist at Citigroup Inc. in New York wrote in a note to clients.

The Treasury is due to auction $24 billion of 10-year securities tomorrow and $16 billion of 30-year debt on Nov. 8. The sales will raise $8.9 billion of new cash as maturing securities held by the public total $63.1 billion, according to the Treasury.

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