Treasuries fall before U.S. auctions $32 billion in 3-year notes

Treasuries fell, pushing 10-year yields up to the highest level in two weeks, as the U.S. prepared to sell $32 billion in three-year debt in the first of three note and bond sales this week totaling $66 billion.

Longer-term securities led the declines after a report showed German investor confidence jumped more than forecast this month. The yield gap between Treasuries and inflation-indexed debt indicates inflation expectations are at the highest level in a month as Federal Reserve policy makers start a two-day meeting at which they’re forecast to decide to make additional Treasury purchases.

“There’s a big chunk of supply,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “It puts a little pressure on the market. The three-year auction won’t be a big deal. The front end has plenty of buyers.”

The benchmark 10-year yield climbed four basis points, or 0.04 percentage point, to 1.65 percent at 9:56 a.m. New York time, according to Bloomberg Bond Trader prices. The 1.625 percent note due in November 2022 fell 10/32, or $3.13 per $1,000 face amount, to 99 3/4. The yield matched its level on Dec. 3, the highest since Nov. 27.

Ten-year break-even rates, the difference between yields on U.S. 10-year notes and Treasury Inflation Protected Securities, touched 2.51 percentage points, the most since Nov. 7. The gap measures investor expectations for inflation over the life of the securities.

Thirty-year yields rose four basis points to 2.84 percent.

Debt Auction

The three-year notes to be sold today yielded 0.33 percent in pre-auction trading, compared with a yield of 0.392 percent at the previous sale of the maturity on Nov. 6.

Investors bid for 3.41 times the amount of debt available last month, down from 3.96 times at the Oct. 9 sale. Primary dealers, which trade directly with the Fed, bought 52.7 percent of the securities, the most in three months.

“Three-year notes are at expensive, historically rich levels,” said Craig Collins, managing director of rates trading at Bank of Montreal in London. “This little backup in yields we’ve had will probably help the auction go even better.”

Short-term Treasuries may be supported by a potential flood of cash into the U.S. money markets if unlimited Federal Deposit Insurance Corp. coverage is allowed to lapse later this month.

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