Treasuries Fall After 2-Year Note Auction as Fed Meets

Yields on benchmark 10-year Treasury notes rose for the first time in a week after the U.S. sold $35 billion of two-year securities and Federal Reserve policy makers began a two-day meeting.

The notes drew a yield of 0.270 percent, compared with a forecast of 0.278 percent in a Bloomberg News survey of nine of the Fed’s 21 primary dealers, as investors continue to seek the safest assets. Treasury will sell $35 billion in five-year notes tomorrow and $29 billion of 10-year debt the next day.

“The market is a tad weaker as we are giving back some of the recent rally, but we are still at very low yield levels as the market waits for the Fed,” said Guy LeBas, chief fixed- income strategist in Philadelphia at Janney Montgomery Scott LLC, which oversees $12 billion in Fixed income assets. “Moderation in the U.S. economic data doesn’t seem to be going away and no one wants to do much before the Fed has its say tomorrow.”

The yield on the benchmark 10-year note rose four basis points, or 0.04 percentage point, to 1.97 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. The 2 percent note due February 2022 fell 11/32, or $3.44 per $1,000 face amount, to 100 7/32. The yield on the current two-year note rose one basis point to 0.27 percent.

The two-year notes sold today drew a bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, of 3.76, highest since September, compared with an average of 3.56 for the past 10 sales.

‘Lot of Uncertainty’

Indirect bidders, an investor class that includes foreign central banks, purchased 32.1 percent of the notes, compared with an average of 32.4 percent for the past 10 sales.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 7.8 percent of the notes at the sale, the lowest since February 2011, compared with an average of 13.5 percent for the past 10 auctions.

Two-year notes have gained 0.1 percent this year, compared with a 0.2 percent gain for Treasuries overall, according to Bank of America Merrill Lynch indexes.

“The Fed is still on hold and there is a lot of uncertainty with regard to Europe and the economy and that is keeping demand for Treasuries pretty high,” said Scott Sherman, an interest-rate strategist at primary dealer Credit Suisse Group AG in New York. “The market is focused on the FOMC, and we won’t do much either way until that is out of the way.”

Trading Volume

Trading volume climbed to $216.7 billion after dropping April 20 to the lowest level this year, with about $130 billion of Treasuries changing hands through ICAP Plc, the world’s largest interdealer broker. The average in 2012 is $249 billion. Volume reached $439 billion on March 14, the highest since August.

“People don’t want to short the Treasury market,” said Paul Horrmann, a broker in New York at Tradition Asiel Securities Inc., an interdealer broker. “The Fed is still going to be keeping rates low till 2014. You can’t fight the Fed.” A short is a bet the price of a security will drop.

Ten-year yields may be in a range of 2 percent to 2.5 percent with the potential to rise to 2.75 percent in 2012, according to Charles Schwab Corp., which is based in San Francisco and manages $199 billion.

“We don’t anticipate that the Fed will change policy this year and it seems unlikely at this juncture that they will engage in more” asset purchases, Kathy A. Jones, a fixed-income strategist at the company, wrote in an e-mail.

‘Long’ Bets Drop

Investors in Treasuries reduced expectations that prices of the securities will climb as the percentage of so-called long positions dropped in a weekly survey by JPMorgan Chase & Co.

The percent of net longs in the firm’s all-clients survey dropped to two percentages points, to 23 percent from 25 percent, in the week ended yesterday. The number of outright neutrals was unchanged at 57 percent. The level of outright shorts rose to 21 percent from 19 percent the previous week.

The central bank bought $4.8 billion of Treasuries due from April 2018 to February 2020 today. The purchases are part of the bank’s effort to replace $400 billion of shorter-term debt in its holdings with longer maturities to hold down borrowing costs.

U.S. central bankers bought $2.3 trillion of bonds in two rounds of so-called quantitative easing between December 2008 and June. They’ve also said they will probably keep their target for overnight lending between banks at almost zero at least until late 2014. Chairman Ben S. Bernanke is scheduled to hold a press conference tomorrow.

“Everybody is hoping for relief from insight from the Fed,” said Tradition Asiel’s Horrmann.

To contact the reporter on this story: Cordell Eddings in New York at ceddings@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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