Treasuries Stay Higher Amid Strongest Sale Demand Since January

Treasuries remained higher after the U.S. sold $32 billion of two-year notes to the strongest demand in 11 months as the Federal Reserve opens a two-day meeting.

The notes drew a yield of 0.345 percent, compared with a forecast of 0.349 percent in a Bloomberg News survey of seven of the Fed’s 21 primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.77, the highest since January, compared with an average of 3.26 for the past 10 sales. The Fed will issue a statement tomorrow that may cut its monthly bond purchases and offer more guidance on the timing of an eventual increase in the key interest rate.

“The auction went pretty well,” said Dan Greenhaus, chief global strategist in New York at BTIG LLC. “You are seeing a little pullback in yields. It’s all about positioning in front of the Fed. No one is exactly sure what’s going to happen tomorrow.”

The yield on the current two-year note declined one basis point, or 0.01 percentage point, to 0.32 percent at 1:22 p.m. in New York, according to Bloomberg Bond Trader Prices. The yield on the 10-year note fell three basis points to 2.85 percent.

The central bank will probably start curtailing its $85 billion in monthly bond purchases this week after unexpectedly refraining from reducing them in September, according to 34 percent of economists surveyed Dec. 6 by Bloomberg, an increase from 17 percent in a Nov. 8 survey. The Fed buys the assets to hold down borrowing costs and fuel economic growth.

Benchmark Rate

Policy makers have kept the benchmark interest-rate target for overnight loans between banks at zero to 0.25 percent since 2008. Fed Chairman Ben S. Bernanke said last month the rate will probably stay low long after bond buying ends.

The odds of an increase in the rate by January 2015 are about 15 percent, based on data compiled by Bloomberg from futures contracts.

At today’s auction, indirect bidders, an investor class that includes foreign central banks, purchased 21.5 percent of the notes, the least since August. That compared with an average of 24.6 percent for the past 10 sales.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 30.2 percent of the notes at the sale, compared with an average of 22.4 percent for the past 10 auctions.

Note’s Return

Two-year notes have returned 0.3 percent this year, compared with a loss of 2.9 percent by the broad Treasuries market, according to Bank of America Merrill Lynch indexes. The two-year securities gained 0.3 percent in 2012, while Treasuries in total rose 2.2 percent.

Today’s offering is the first of four note auctions this week totaling $112 billion. The government will sell $35 billion in five-year debt tomorrow. On Dec. 19, it will offer $29 billion in seven-year notes and $16 billion in five-year Treasury Inflation Protected Securities.

Investors bid $2.88 for each dollar of the $2.06 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.

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