U.S. 2-Year Notes Set to Yield Least at Sale in 3 Months

Treasury two-year notes are poised to draw the lowest auction yield in three months as investors prepare to bid for $31 billion of the securities today.

Two-year notes gained for the past four weeks, the longest rally since July 2012, as the Federal Reserve damped concern it’s moving closer to raising interest rates. Treasury 10-year notes fluctuated as reports showed orders for U.S. durable goods unexpectedly increased in April while home prices in 20 U.S. cities rose at a slower pace in March from a year earlier.

“With the Fed keeping the fed funds rate lower for longer and the European Central Bank and other central banks considering more monetary action, front-end yields have been anchored,” said Justin Lederer, an interest-rate strategist at Cantor Fitzgerald LP in New York, one of 22 primary dealers that trade with the Fed. “These yields are justified, and the auction should go well given the monetary policy outlook.”

Current U.S. two-year note yields were little changed at 0.35 percent at 11:39 a.m. New York time, according to Bloomberg Bond Trader data. The price of the 0.375 percent security maturing in April 2016 was 100 1/32. The benchmark 10-year yield advanced as much as two basis points, or 0.02 percentage point, to 2.55 percent and fell to 2.52 percent before trading at 2.53 percent.

Two-year notes scheduled for sale today yielded 0.395 percent in pre-auction trading. Offerings of two-year securities drew yields of 0.447 percent in April and 0.469 percent in March.

The April auction’s bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 3.35, matching the average in the past 10 sales of the security.

More Auctions

The U.S. is also scheduled to sell $13 billion of two-year floating-rate notes and $35 billion of five-year fixed-rate debt tomorrow. The government plans to auction $29 billion of seven-year securities on May 29.

Bookings for goods meant to last at least three years rose 0.8 percent after a 3.6 percent gain in the prior month that was stronger than previously reported, Commerce Department figures showed today in Washington. Economists surveyed by Bloomberg called for a 0.7 percent drop. Orders excluding transportation equipment also advanced.

“It tells you momentum going into second quarter was a little bit better,” said Ira Jersey, an interest-rate strategist at Credit Suisse Group AG in New York, another primary dealer. “Taken as a whole, the economy is still on pretty solid ground -- in March and April.”

Home Prices

Home prices cooled, another report showed. The S&P/Case-Shiller index of property values increased 12.4 percent from March 2013, the smallest 12-month gain since July, a report from the group showed today in New York.

The Conference Board’s index of U.S. consumer confidence rose to 83 in May from 81.7 a month earlier, the New York-based private research group said today.

The Fed has kept its target for federal funds, the rate banks charge each other on overnight loans, at almost zero since December 2008.

Officials reduced the central bank’s monthly bond purchases to $45 billion at a policy meeting on April 29-30. The Fed bought $2.4 billion of Treasuries today maturing from August 2022 to February 2024 as part of the program, which was designed to hold down borrowing costs and spur economic growth.

In the Fed’s interest-rate projections issued March 19, the median year-end estimate among policy makers was 1 percent for 2015 and 2.25 percent for 2016.

ECB President Mario Draghi signaled yesterday that policy makers in the euro region are ready to expand monetary stimulus. The central bank is seeking to prevent inflation from staying too low and to sustain the area’s gradual recovery.

‘Still Fragile’

“While the U.S. economy is doing better than Europe’s, the recovery is still fragile,” said Owen Callan, a bond analyst at Danske Bank A/S in Dublin. “Although the Federal Reserve is likely to continue with its tapering, we think it may take longer for the recovery to take hold and for the Fed to be confident enough to raise interest rates. Yields should be well-anchored at the front end.”

Fed Chair Janet Yellen emphasized this month the U.S. economy is falling short of the central bank’s goals and still needs help, easing concern policy makers are preparing to raise rates. The U.S. has further to go to achieve full health, Yellen said.

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

“The market’s pricing in an extraordinarily slow Fed,” Margaret Kerins, the Chicago-based head of fixed-income strategy at the primary dealer Bank of Montreal, said by telephone on May 20. “Potential growth is a huge determinant of that long-term rate and most people are buying into the idea of lower potential growth.”

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