Treasuries fluctuated before today’s auction of $35 billion of two-year notes amid speculation whether European leaders are making progress toward resolving the region’s financial crisis.
Yields dropped from the highs on the day after Reuters reported that German Chancellor Angela Merkel rejected shared liability for debt, citing people at a meeting of the nation’s coalition parties. The $35 billion auction is the first of three note sales this week totaling $99 billion.
“The constant debate in Europe is keeping us near these low yield levels as we are still in the middle of a banking and sovereign-debt crisis,” said Tom Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp.
The 10-year yield rose three basis points, or 0.03 percentage point, to 1.63 percent at 12:39 p.m. in New York, according to Bloomberg Bond Trader prices. It climbed five basis points earlier. Thirty-year bond yields were up two basis points to 2.69 percent after advancing as much as four basis points.
Two-year note yields were little changed at 0.31 percent, versus the record low of 0.1431 percent set in September.
The S&P/Case-Shiller index of property values in 20 cities dropped 1.9 percent in April from the same month in 2011, the smallest decline since November 2010, after falling 2.6 percent in the year ended March, the group said today in New York. The median forecast in a Bloomberg News survey of economists projected a 2.5 percent drop.
Treasuries trimmed declines after confidence among U.S. consumers declined in June to a five-month low. The Conference Board’s index dropped for a fourth straight month, to 62 from a revised 64.4 in the prior month, figures from the New York-based private research group showed. The median forecast of economists surveyed by Bloomberg called for a reading of 63.
The two-year notes being sold today yielded 0.313 percent in pre-auction trading. They reached a record sale low of 0.222 percent at the August offering.
Today’s auction faces an extra hurdle from the Federal Reserve, which is selling short-term debt from its holdings to buy longer maturities. The Fed announced last week that it plans to extend the program, known as Operation Twist, through year-end to spur the economy.
“The market is mindful of the supply and what the Fed will do with Operation Twist,” said Orlando Green, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “There’s a lot of supply coming through and that remains a hindrance and is weighing on the market. The Treasury isn’t going to slow down on its funding needs.”
The Fed will buy as much as $5.5 billion of Treasuries today due from August 2020 to May 2022 as part of Operation Twist. It sold $8.37 billion of U.S. securities yesterday due from March to October 2014.
Investor appetite for the safest securities helped increase bidding at the previous two-year auction on May 22, which drew a yield of 0.30 percent. The bid to cover ratio, which gauges demand by comparing the amount bid with the amount offered, was Money managers submitted 3.95, the highest since the November sale of the maturity.
The U.S. will auction $35 billion of five-year notes tomorrow and $29 billion of seven-year debt on June 28.
Spain sold 3.08 billion euros ($3.85 billion) of bills, with the three-month note yielding 2.362 percent, compared with 0.846 percent at the previous auction. Italy sold 2.99 billion euros of zero-coupon 2014 notes at a yield of 4.71 percent, up from 4.04 percent at the previous offering.
Treasuries rallied yesterday as investors sought a refuge on speculation European leaders will fail to stem the euro bloc’s debt crisis at a two-day summit starting June 28. Moody’s Investors Service cut the credit ratings of 28 Spanish banks yesterday including Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA.
U.S. government securities have returned 1.9 percent this year as of yesterday, after gaining 9.8 percent in 2011, according to Bank of America Merrill Lynch indexes, as Europe’s debt crisis boosted safety demand.
Fed officials led by Chairman Ben S. Bernanke last week extended Operation Twist by $267 billion through year-end.