Demand for Treasuries steady even with increased supply

NEW YORK: Increased supply did not quell demand for three- and 10-year Treasury notes auctioned Monday, a positive sign for the heavy issuance expected in the year ahead.

Monday's auctions saw the $28 billion three-year note sold at slightly lower-than-expected yields at 2.436 percent, suggesting steady demand from investors. The high yield at the $21 billion 10-year note reopening was 1 basis point below the expected number.

"It was an on-the-screws type auction. Nothing really stood out. You can consider that a good thing, given this year will see more and more Treasuries issued," said George Goncalves, head of US rates strategy at Nomura Securities International in New York.

The increased supply did exert some pressure on prices. The ratio of bids to the amount sold was slightly below average for both maturities, but the difference was not significant enough to suggest waning demand. The three-year supply had increased by $2 billion from the last auction, and the 10-year reopening was $1 billion larger than the last reopening.

The supply of US debt at auction has increased as the Federal Reserve has begun to withdraw liquidity and reduce its bond buying. The government has also been forced to boost issuance to help fund President Donald Trump's tax overhaul and two-year budget deal.

The federal debt load is expected to swell by as much as $1.5 trillion because of the tax overhaul signed into law in December, while the budget agreement would boost government spending by almost $300 billion over the next two years.

Still, "We're not at a point yet where auction sizes are so big that it causes real digestion issues," said Tom Simons, money market economist at Jefferies & Co in New York, referring to February's near-record issue of supply. "We're still talking about the difference between a really good auction and an average one."

The primary focus this week will be the publication on Tuesday of Consumer Price Index data for February, a key measure of inflation. The number for January beat estimates, increasing expectations the Fed may raise interest rates four times in 2018.

The yield on the three-year note was last at 2.425 percent, slightly off the 10-year high of 2.455 percent reached on Friday. The benchmark 10-year government note was last at 2.868 percent, down from 2.957 percent hit on Feb. 21, its highest since trading above 3 percent in January 2014.