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Treasury Two-Year Yields Near Four-Week Low on Fed Rate Outlook

June 22 (Bloomberg) -- Treasury two-year yields were near the lowest level since May on speculation the Federal Reserve will reiterate its pledge to keep interest rates near zero to help spur the recovery.

Treasuries of all maturities are headed for the best first half in a decade on speculation reduced inflationary pressures will prompt policy makers to repeat their pledge to keep borrowing costs low at the end of the Federal Open Market Committee’s two-day meeting starting today. The Treasury will sell a combined $108 billion of two-, five- and seven-year notes this week, the least for those securities since June 2009.

“The FOMC is not going to move and the language is not going to change because it’s too early for the Fed to even contemplate moving rates,” said Kumar Palghat, who helps manage the equivalent of $1.6 billion at Kapstream Capital in Sydney. “Economic data in the U.S. is mixed and you still have the European overhang.”

The two-year note yielded 0.72 percent as of 8:53 a.m. in Tokyo, according to BGCantor Market Data. The yield fell to 0.69 percent on June 17, the lowest level since May 25. The 0.75 percent security due May 2012 traded at 100 2/32.

The government will auction $40 billion in two-year debt today, $38 billion in five-year notes tomorrow and $30 billion in seven-year securities on June 24. The total is $5 billion less than last month’s sales.

‘Relatively Strong’

“The two-year auction won’t be a home run, but demand in the front end is still relatively strong,” said Jason Rogan, director of U.S. government trading in New York at Guggenheim Partners LLC, a brokerage for institutional investors.

Indirect bidders, an investor class that includes foreign central banks, bought 36 percent of the two-year notes at the prior auction on May 25, compared with an average of 42 percent over the past 10 sales.

The two-year notes to be auctioned today yielded 0.75 percent in pre-auction trading, compared with 0.769 percent at the previous sale.

The Federal Reserve will hold the benchmark interest rate at a record-low range of zero to 0.25 percent at this week’s meeting, according to all of the 96 economists surveyed by Bloomberg News.

To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net.

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.

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