U.S. 2-Year Notes Gain Fourth Week on Rate-Rise Outlook

Treasury two-year notes rose for a fourth week, the longest rally since July 2012, as minutes from the Federal Reserve’s last policy meeting eased concern officials are moving closer to raising borrowing costs.

Yields on the securities, more sensitive than longer-maturity debt to changes in expectations of central-bank policy, are below where they were on March 19, when Fed Chair Janet Yellen jolted markets by saying interest rates may rise as soon as the middle of next year. The Treasury is scheduled to auction $108 billion in fixed- and floating-rate notes next week.

“The sentiment is that the Fed is going to be on hold for a long period of time,” said Jason Rogan, managing director of U.S. government trading at Guggenheim Securities LLC, a New York-based brokerage for institutional investors. “There had been some strong selling in the front end in anticipation a rate hike may come within the next year.”

U.S. two-year note yields fell two basis points, or 0.02 percentage point on the week, to 0.34 percent yesterday in New York, according to Bloomberg Bond Trader data. They touched 0.32 percent on May 20, the lowest level since March 14. The price of the 0.375 percent security due April 20 rose 1/32, or 31 cents per $1,000 face amount, to 100 2/32.

The benchmark 10-year note yield rose one basis point on the week to 2.53 percent.

Treasuries trading closed yesterday at 2 p.m. in New York and will stay shut worldwide on May 26 for Memorial Day in the U.S. and the Spring Bank Holiday in the U.K., according to the Securities Industry and Financial Markets Association.

Going Long

Hedge-fund managers and other large speculators increased their net-long position in two-year note futures to the highest this year in the week ending May 20, according to U.S. Commodity Futures Trading Commission data.

Speculative long positions, or bets prices will rise, outnumbered short positions by 37,162 contracts on the Chicago Board of Trade, the highest since December. Net-long positions rose by 14,422 contracts, or 63 percent, from a week earlier, the Washington-based commission said.

Treasuries returned 2.9 percent this year, after losing 3.4 percent in 2013, according to Bank of America Merrill Lynch Indexes. Two-year notes have gained 0.5 percent in 2014, including a 0.2 percent advance this month, according to the Merrill Lynch indexes.

Fed View

Participants at the April 29-30 FOMC meeting agreed that “early communication” of their exit strategy “would enhance the clarity and credibility of monetary policy,” according to minutes released this week. While no decisions were taken, “participants generally favored the further testing of various tools” that could eventually be used to control short-term borrowing costs once rates are lifted, the minutes showed.

The Fed funds rate will be at 2 percent in 2017, up from the current zero-to-0.25 percent level, according to Bill Gross, who runs the $230.4 billion Total Return Fund at Pacific Investment Management Co. in Newport Beach, California. It’s the “best guess for now,” Pimco’s founder wrote in a Twitter post yesterday.

Treasuries rose yesterday as investors sought refuge amid turmoil in Ukraine, where violence marred preparations for elections on May 25. Yields also dropped as German business confidence fell more than forecast, adding to signs expansion in the euro area’s largest economy will slow this quarter.

‘Good Value’

Demand for U.S. debt was also supported by yields higher than other sovereign securities and amid expectations the European Central Bank may introduce further stimulus.

U.S. government securities are yielding 60 basis points more than German bunds, according to Bank of America Merrill Lynch bond indexes. The spread reached 62 basis points last month, the most since June 2007.

“When you look at Treasuries versus a number of other safe and sovereign assets, Treasuries still offer pretty good value,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co.

The extra yield 10-year Treasuries offer over their Group of Seven peers was 55 basis points yesterday, above the one-year average of 38 basis points.

The difference between yields on 10-year notes and same-maturity TIPS, a gauge of trader expectations for consumer prices over the life of the debt known as the break-even rate, was 2.22 percentage points yesterday. The average for the past decade is 2.21 percentage points.

Treasury Inflation Protected Securities have returned 5 percent in 2014, after losing 9.4 percent in 2013, according to Bank of America Merrill Lynch Index.

The U.S. sold $13 billion in 10-year TIPS on May 22 at a yield of 0.339 percent, the lowest since May 2013.

The Treasury will auction $31 billion in two-year debt on May 27, down from $32 billion at the past seven auctions of the securities. It will sell $13 billion in two-year floating-rate notes and $35 billion in five-year securities on May 28, and $29 billion in seven-year securities the next day.

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