Treasury 2-Year Notes Rally as Fed Members Say View Overstated

Treasury two-year notes rallied after meeting minutes showed Federal Reserve policy makers said a rise in their median projection for the main interest rate exaggerated the likely speed of policy tightening.

The difference between yields on two- and 30-year securities widened to the most in almost three weeks on speculation central bank increases in interest rates won’t be accelerated. U.S. debt fell earlier as the Treasury sold $21 billion of 10-year securities as part of $64 billion of note and bond sales this week. Benchmark 10-year debt had gained the past four days as concern eased that Fed Chair Janet Yellen and central bank policy makers would wind down of monetary stimulus sooner than forecast.

“The minutes were not as hawkish as the press conference by Yellen, as well as the market’s interpretation of Yellen’s comments,” said Gary Pollack, who manages $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York. The market is re-pricing in the odds of a tightening move by the Fed -- it is pushing it out.’’

Two-year note yields fell three basis points, or 0.03 percentage point, to 0.36 percent at 4:59 p.m. in New York, according to Bloomberg Bond Trader prices. The yield was up as much as two basis points earlier today. The price of the 0.375 percent security due in March 2016 rose 2/32, or $0.63 per $1,000 face amount, to 100 1/32.

Yield Curve

The benchmark 10-year yield rose one basis point to 2.69 percent, after rising as much as four basis points. The yield declined 12 basis points during the previous four days. The yield on the 30-year bond rose four basis points to 3.57 percent.

The gap between two- and 30-year debt, the yield curve, reached 321 basis points, the most since March 21. It narrowed to 304 basis points on March 27, the least since June.

Traders’ wagers put the likelihood the Fed will start raising rates in June 2015 at 45 percent, based on futures trading on the CME Group Inc.’s exchange, compared with 54 percent on April 4. The Fed has kept its target for overnight lending between banks in a range of zero to 0.25 percent since 2008.

Volatility in U.S. government debt as measured by the Bank of America Merrill Lynch MOVE Index fell to 54.72, the lowest level since May.

Trading Pace

Treasury trading volume rose $449 billion from $300 billion yesterday, according to ICAP Plc, the largest inter-dealer broker of U.S. government debt. Volume rose to $582.4 billion on March 13, the highest in more than nine months, according to ICAP.

Treasury yields rose last month after policy makers predicted that the benchmark interest rate would rise faster than previously forecast. Yellen, presiding over her first meeting as chair, later downplayed the importance of the forecasts, even as she said that rates might start to rise “around six months” after the Fed ends its bond-purchase program.

“Several participants noted that the increase in the median projection overstated the shift in the projections,” the minutes of the March 18-19 Federal Open Market Committee meeting showed. Some expressed concern the rate forecasts “could be misconstrued as indicating a move by the committee to a less accommodative reaction function.”

“It’s dovish for the rates market because it initially sold off because they thought participants were expecting a sooner and faster hiking cycle,” said Shyam Rajan, an interest-rate strategist at Bank of America Corp., one of 22 primary dealers that trade with the Fed. “The fact that they are playing it down is bullish.”

Auction Result

Today’s 10-year auction drew a yield of 2.720 percent, compared with a forecast of 2.710 percent in a Bloomberg News survey of seven of the Fed’s 22 primary dealers.

The previous 10-year note auction on March 12 produced a yield of 2.73 percent. Today’s sale is a re-opening of the 10-year note sold Feb. 12.

The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.76, down from 2.92 at the previous sale and the lowest since February.

“It was not a terrible auction, but it’s not an auction on par with last month’s, in terms of overall bidding receptivity,” said Christopher Sullivan, who oversees $2.3 billion as chief investment officer at United Nations Federal Credit Union in New York. “Dealers wound up with more of the auction balances than their average over the last several auctions.”

Primary dealers bought 40.1 percent of the notes, the most since December.

Sale Results

Indirect bidders, an investor class that includes foreign central banks, purchased 44.7 percent of the notes, compared with an average of 44.8 percent for the past 10 sales.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 15.2 percent of the notes, compared with an average of 18.1 percent at the past 10 auctions.

Today’s offering is the second of three note and bond sales this week. The U.S. sold $30 billion of three-year debt yesterday at a yield of 0.895 percent and will auction $13 billion of 30-year securities tomorrow.

The sales will raise $13.5 billion of new cash, as maturing securities held by the public total $50.5 billion, according to the U.S. Treasury.

Ten-year notes have gained 3.8 percent this year, compared with a 1.9 percent return in the broader U.S. Treasuries market, according to Bank of America Merrill Lynch indexes. The benchmark notes lost 7.8 percent in 2013, versus a 3.4 percent decline by Treasuries overall.

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