Treasury Two-Year Yields Fall to 2011 Low on Bernanke’s Outlook

Treasury two-year note yields fell to the lowest level this year as Federal Reserve Chairman Ben S. Bernanke said the central bank should maintain record monetary stimulus to boost an “uneven” economic recovery.

Yields on three-year notes dropped for a third day after the U.S. government’s $32 billion auction of the debt drew the highest demand from a group including foreign central banks in five months. Longer-term debt yields were little changed before the $21 billion sale of 10-year notes tomorrow and the $13 billion 30-year bond offering June 9.

“The market is beginning to price a recession,” said Charles Comiskey, head of Treasury trading at Bank of Nova Scotia in New York. “He’s not saying that, but that’s what the market’s beginning to price.”

Yields on two-year notes dropped two basis points, or 0.02 percentage point, to 0.40 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. The 0.5 percent securities maturing in May 2013 gained 1/32, or 31 cents per $1,000 face amount, to 100 6/32.

The two-year note yields touched 0.39 percent, the lowest level since Nov. 9. The benchmark 10-year note yields were little changed at 2.99 percent. The yields on existing three-year notes slid four basis points to 0.69 percent.

The central bank should maintain record monetary stimulus to boost an “uneven” and “frustratingly slow” economic recovery, Bernanke said in text of a speech at a conference in Atlanta.

‘Below Its Potential’

“The economy is still producing at levels well below its potential; consequently, accommodative monetary policies are still needed,” Bernanke said. “Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established.”

U.S. employers added less than a third the number of workers in May than economists forecast, and the jobless rate rose to 9.1 percent from 9 percent, the Labor Department reported last week.

The difference in yield between two- and 30-year debt was 3.85 percentage points, the widest since March on speculation policy makers will keep interest rates on hold. The 30-year bond yield was little changed at 4.25 percent.

Futures contracts showed the likelihood of an increase in the fed funds target by the Fed’s March 2012 meeting fell to 23 percent, from 38 percent odds a month ago. The target rate for overnight lending between banks has been held at zero to 0.25 percent since December 2008.

Fed Debt Buying

The central bank purchased $1.44 billion of Treasury Inflation Protected Securities maturing from July 2013 to February 2041 today under the second round of quantitative easing, which expires this month.

At today’s three-year note auction, the securities produced a yield of 0.765 percent, the lowest since the November offering. The average forecast in a Bloomberg News survey of seven of the 20 primary dealers was 0.760 percent.

The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.28, compared with an average of 3.15 for the previous 10 sales.

Indirect bidders, an investor class that includes foreign central banks, purchased 35.6 percent of the notes, the highest since the January offering. Direct bidders, non-primary dealer investors that place their bids directly with the Treasury, purchased 9.2 percent of the notes, compared with the 10-auction average of 13.4 percent.

‘Good Auction’

“It was a good auction,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors. “It bodes well for the next two. It also suggests there may be more upside to Treasuries once we get through this auction cycle.”

Shorter-dated yields lagged behind those of longer-maturity debt on speculation U.S. interest rates will stay low to support the economic recovery.

Treasuries dropped earlier after Germany’s Chancellor Angela Merkel told U.S. President Barack Obama yesterday at a dinner in Washington that the euro region will “emerge strengthened” from the debt crisis.

Obama said today at a joint news conference with Merkel at the White House that they agreed that the financial situation in Europe “cannot be allowed to put the global economic recovery at risk.”

At a Montreal event yesterday, European Central Bank President Jean-Claude Trichet gave the first signal that he endorses measures to encourage investor purchases of new Greek bonds to replace maturing securities. Two officials familiar with the bank’s deliberations said on condition of anonymity last week that the ECB was considering rollovers as a means of easing Greece’s funding squeeze.

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