Treasury Sale Reflects Strength of U.S. Bond Market

Foreign central banks and other investors snapped up the U.S. Treasury’s issue of $40 billion (U.S.) in three-year notes Monday.

“The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered was 3.33, the most since at least 1993,” according to Bloomberg News. The last 10 auctions averaged 2.63.

“That sets the stage for going into the long-term supply later this week,” said Stewart Hall, a currency and fixed income strategist with HSBC Securities Canada Inc.

The U.S. Treasury is scheduled to sell $25 billion in 10-year Treasuries Tuesday and $16 billion in 30-year bonds on Thursday.

“The pricing action suggests a more positive tone for the bond markets,” Mr. Hall said. There is strong demand both domestically from savers and, as usual at the bottom of a recession, by U.S. banks, that are reticent to lend, he said.

“Foreign investors have continued to take down an increasingly large amount of supply,” Mr. Hall said. The indirect bidding category, which is often seen as a function of foreign demand, accounted for 68.5 per cent of the demand for the three-year notes. “Treasury buying [by foreigners] has been growing by leaps and bounds,” Mr. Hall said.

The foreign investors include central banks, which continue to buy U.S. bonds despite claims that their appetite for the debt might be waning.

“Some foreign institutions feel obliged to buy even more dollars to support the dollar against their own currencies because they don’t want their own currencies to appreciate too much,” Carl Lantz, an interest-rate strategist at Credit Suisse Securities LLC told Bloomberg.

The U.S. dollar is at its lowest level since early August, 2008, when measured against six major world currencies. At that time the Dow Jones Industrial Index was at 11,530 points. The index is trading around 10,214 points.

The surge in the Dow, the S&P 500 and Nasdaq could reflect investor anticipation of foreign exchange gains by U.S. multinationals and a boost to corporate profits from exports.