Yields hold near 1-month highs after 3-year note auction



Benchmark U.S. Treasurys yields held near their highest levels in over a month on Tuesday after the Treasury Department auctioned $27 billion in three-year notes at a high yield of 1.066 percent, the highest yield since April 2011. The bid-to-cover ratio, an indicator of demand, was 3.17.

Foreign central banks and other indirect bidders bought 33.11 percent at the latest three-year note supply, their smallest share since June.

Large money managers, smaller bond dealers and other direct bidders purchased 20.27 percent of the three-year supply, which was higher than the 19.03 percent they bought in August.

Primary dealers or the 22 top Wall Street firms that do business directly with the Federal Reserve bought 46.63 percent of the supply, which was larger than August's 44.77 percent.

Benchmark 10-year U.S. Treasury notes were last down 7/32 in price to yield 2.50 percent, slightly below an earlier session high of 2.51 percent, which was the highest yield since August 5. Meanwhile, U.S. 30-year Treasury bonds were down 4/32 in price to yield 3.23 percent.

U.S. three-year notes where trading 4/32 lower in price at 1.04 percent.

The Treasury will also sell $21 billion in 10-year notes on Wednesday and $13 billion 30-year bonds on Thursday.

Yields rose earlier after the San Francisco Federal Reserve Bank published research on Monday that showed investor expectations on interest rates differed from those of U.S. monetary policymakers, ramping up concerns the Fed could signal an earlier-than-expected rate hike at its next policy meeting on Sept. 16-17.

Strong U.S. economic data on areas such as U.S. second-quarter gross domestic product growth and services-sector growth have also led some to believe the Fed will take a more hawkish stance.

"The Fed's projections for the path of interest rates are already more materially aggressive, more rapid hikes, than the market implies by its pricing," said Jake Lowery, fixed income portfolio manager at Voya Investment Management in Atlanta. "The data over the last three months would at least give the Fed more confidence in that base case scenario."

He said the San Francisco Fed paper continued to pressure Treasuries prices Tuesday. The paper Monday showed economists of top Wall Street firms see the third quarter of 2015 as the most likely date of the Fed's first rate rise and estimate the Fed's short-term interest-rate target will be at just 0.75 percent at the end of 2015 and 2.13 percent at the end of 2016.

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By contrast, Fed officials see rates at 1 percent by the end of next year and rising to 2.5 percent by the end of the 2016, the paper said.

The new supply is "hefty" and has led some traders to sell Treasuries in anticipation of buying them back at cheaper prices, said Kim Rupert, managing director at Action Economics in San Francisco.

On Wall Street, U.S. stocks dipped as investors found few reasons to push equities higher, with the benchmark S&P 500 last down 0.46 percent.

—By Reuters