Treasury $32 Billion 2-Year Note Sales Draws Above-Average Bids

Treasury’s sale of $32 billion of two-year notes drew above-average demand on speculation that the Federal Reserve’s efforts to hold down short-term yields will support the debt.

U.S. debt was little changed after the auction’s bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.54, the most since April and above the average of 3.28 for the past 10 sales. The notes were sold at yield of 0.3 percent, compared with a forecast of 0.299 percent in a Bloomberg News survey of seven of the Fed’s 21 primary dealers. Treasury 10-year notes are headed for their worst month since June, according to Bank of America Merrill Lynch Indexes.

“The market is increasingly trusting the Fed,” said Michael Lorizio, senior trader at Manulife Asset Management in Boston. “They want to see significant sustainable improvement before they even think of moving from the zero interest-rate policy.”

The yield on the current two-year note maturing in October 2015 was little changed at 0.28 percent, at 5 p.m. in New York, according to Bloomberg Bond Trader prices. The benchmark 10-year note yield dropped one basis point, or 0.01 percentage point, to 2.73 percent, the third consecutive drop in the security’s yield.

The U.S. will sell $35 billion of five-year debt tomorrow and $29 billion of seven-year securities Nov. 27.

Note Returns

Two-year notes have gained 0.4 percent this year, compared with a decline of 2.5 percent by the broader Treasuries market, according to Bank of America Merrill Lynch indexes.

Indirect bidders, a class of investors that includes foreign central banks, bought 22.5 percent of the securities at the sale. The average for the past 10 auctions is 24.2 percent.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 27.3 percent of the notes at the auction, compared with an average of 22.7 percent at the past 10 sales.

Investors bid $2.88 for each dollar of the $1.9 trillion in U.S. government notes and bonds sold at auction this year, according to Treasury data compiled by Bloomberg. That’s down from the record $3.15 for the $2.153 trillion sold at last year’s offerings.

This week’s auctions will redeem $64.4 billion of maturing securities while raising $31.6 billion of new cash.

The difference in yield between five- and 10-year notes widened to the most in two years last week after the Labor Department said initial claims for jobless insurance fell more than economists forecast. The spread was 1.39 percentage points after expanding to 1.45 percentage points Nov. 21, the most since August 2011.

Fed Policy

“The Fed will be in no rush to raise its policy rate simply because they’ve embarked on a tapering program,” said Christopher Sullivan, who oversees $2.2 billion as chief investment officer at United Nations Federal Credit Union in New York. “The front part of the curve is going to remain well anchored from here.”

The current period contrasts with early September when the market participants, widely expecting the Fed to slow its pace of bond purchases, drove the two-year yield to a 27-month high of 0.53 percent on Sept. 6, Sullivan said.

The Fed has been emphasizing the tapering of bond purchases isn’t a tightening of monetary policy. Fed Chairman Ben S. Bernanke said last week the benchmark interest rate will probably stay low long after the purchases end.

The central bank has held its target for overnight lending between banks, the federal funds rate, in a range of zero to 0.25 percent for almost five years.

The $11.7 trillion Treasury market is betting on history not repeating as the Fed moves closer to reducing stimulus.

Taper Consensus

From futures to derivatives, traders don’t see the central bank raising its benchmark interest rate from a record low until nine months after policy makers end their monthly bond purchases of $85 billion, or late 2015. In September, when the Treasury market was tumbling in the midst of its worst year since 2009, the projected gap was two months, according to Barclays Plc.

When Bernanke first discussed ending purchases May 22, “there was a consensus opinion that ‘Oh my God, this is the end,’” and that an increase to the federal funds rate would “be right on the heels of that last purchase,” said Gregory Whiteley, who manages government-debt investments at Los Angeles-based DoubleLine Capital LP, which oversees $53 billion. “That is not the consensus any longer,” he said in a Nov. 19 telephone interview.

Investors see an 11 percent chance policy makers will increase the target to 0.5 percent or more by January 2015, based on data compiled by Bloomberg from futures contracts.

The U.S. bond market will be shut Nov. 28 for the Thanksgiving holiday, according to the Securities Industry and Financial Markets Association website. SIFMA recommended a 2 p.m. close in New York on Nov. 29.

To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; 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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