Demand for T-notes is healthy

The latest run-up in Treasury bond yields brought investors off the sidelines at Tuesday’s government auction of three-year securities.

The Treasury said it sold $35 billion of three-year notes at a yield of 1.96%, slightly below expectations.

“There was very, very good demand at that price,” said Brian Edmonds, head of interest rates at bond dealer Cantor Fitzgerald in New York. Bids totaled $99 billion for the notes.

Yields on shorter-term Treasuries pulled back across the board Tuesday, after surging Friday and Monday.

The government’s report Friday that the economy lost far fewer jobs than expected helped trigger selling in the Treasury market, pushing up yields, as some traders and investors feared the Federal Reserve might be forced to begin raising short-term interest rates this fall.

That may seem absurd, given the likelihood that the economy will continue to struggle even if the recession ends. But when enough traders get caught with too many bonds, a selling panic can ensue.

The yield on outstanding three-year T-notes had soared from 1.44% on June 3 to 1.96% by Monday as sellers swarmed.

The two-year T-note yield, which jumped from 0.9% on June 3 to 1.39% on Monday, fell to 1.28% on Tuesday.

But longer-term yields were mixed as the market got ready for the Treasury’s sale of $19 billion of 10-year notes today and $11 billion of 30-year bonds Thursday.

The 10-year T-note yield, a benchmark for mortgage rates, fell to 3.85% from 3.88% on Monday. But the 30-year bond rose to 4.65%, a 10-month high, from 4.63% on Monday.

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