Treasuries Decline Before Two-Year Note Sale; Volatility Drops

Treasuries declined, snapping two days of gains, before the government sells $35 billion of two-year notes today.

Price swings in the Treasury markets as measured by options fell, signaling that the Federal Reserve can probably reduce its stimulus program without spurring volatility in the bond market. Three-month implied volatility on 10-year interest-rate swaps dropped to a one-month low of 89.8 basis points. The Fed will begin trimming its $85 billion in monthly bond purchases in September, according to economists surveyed by Bloomberg News.

The benchmark 10-year yield rose three basis points, or 0.03 percentage point, to 2.51 percent at 10:12 a.m. London time, according to Bloomberg Bond Trader prices. The 1.75 percent note due in May 2023 fell 7/32, or $2.19 per $1,000 face amount, to 93 15/32. The yield has fallen from 2.75 percent on July 8, the highest level since August 2011.

The two-year notes scheduled for sale today yielded 0.34 percent in pre-auction trading, compared with 0.43 percent the last time the securities were sold, on June 25.

Demand weakened at the previous two offerings of the notes. The bid-to-cover ratios, which gauge demand by comparing the amount bid with the amount offered, at the June and May auctions were 3.05 and 3.04, the two lowest since February 2011, Treasury data showed.

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