Treasury 2-Year Auction Yield Highest Since 2011 on Fed Anxiety

The Treasury sold $32 billion of two-year notes at the highest yield in almost three years as investors anticipate faster interest-rate increases by the Federal Reserve.

The notes sold yesterday at a yield of 0.469 percent, the highest since the May 2011 monthly auction drew 0.56 percent. The auction’s bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was

3.2, compared with the average of 3.3 for the past 10 sales. It was the lowest bid-to-cover ratio since September.

Fed Chair Janet Yellen rattled investors on March 19 by saying the fed funds rate, which has been close to zero since 2008, may rise about six months after the Fed stops buying bonds. Yields on all government securities surged last week, with those on two-year notes climbing eight basis points, the most since June. The odds policy makers will increase the rate to 0.5 percent or more by January are about 19 percent, based on futures contracts. They were at 11 percent a month ago.

“The market has gotten the message,” said Carlos Pro, an interest-rate strategist at Credit Suisse Group AG in New York, one of 22 primary dealers that bid at U.S. auctions. “And as such, more risk premium is being priced in to the front-end.”

The yield on the current two-year note maturing in February 2016 fell less than one basis point to 0.43 percent as of 5 p.m. in New York, according to Bloomberg Bond Trader Prices.

Overnight Rate

Policy makers have kept the benchmark interest-rate target for overnight loans between banks at zero to 0.25 percent since December 2008. The central bank reduced bond-buying under its quantitative-easing stimulus strategy by $10 billion a month in March following cuts in January and again in February, citing economic improvement. It now purchases $55 billion a month. The Fed buys the debt to hold down borrowing costs and fuel economic growth.

Two-year notes have returned 0.07 percent this year, compared with a gain of 1.5 percent by the broad Treasuries market, according to Bank of America Merrill Lynch indexes. The two-year securities gained 0.3 percent in 2013, while Treasuries fell 3.4 percent.

“Since the FOMC meeting, we’ve had more volatility and thus more risk premium added to the front-end,” said David Ader, head of U.S. government bond strategy at CRT Capital Group LLC in Stamford, Connecticut. “Two-year notes have gotten rather inexpensive relative to where they have been, and with the important approach of quarter end this is not a bad place to buy.”

The yield on the notes compared with a 0.471 percent forecast in a Bloomberg News survey of seven primary dealers.

Bidder Participation

Indirect bidders bought 40.9 percent of the notes at yesterday’s sale, compared with 26.7 percent average at the last 10 auctions.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 21.5 percent of the notes. This compares with an average of 21.5 percent at the past 10.

The offering is the first of four auctions of coupon-bearing debt this week. Today, the Treasury will sell $13 billion in two-year floating-rate notes and $35 billion five-year securities. It will auction $29 billion of seven-year notes the next day.

Before it's here, it's on the Bloomberg Terminal.