Treasury 2-Year Auction Yield Set for Highest Since 2011Cordell Eddings and Daniel Kruger
Treasury two-year notes yielded the most in three years in pre-auction trading before the U.S. sells $30 billion of the securities amid speculation the Federal Reserve is on pace to raise interest rates next year.
Ten-year notes dropped as home sales in May had the biggest monthly sales gain in almost three years. A gauge of expectations for consumer prices over 10 years climbed to the highest in five months before Fed officials speak this week with markets indicating a 60 percent chance interest rates will rise by July next year. The U.S. will sell $107 billion of coupon-bearing debt this week.
“As the market slowly prices in a potential rate hike, we are creeping up in yield in the front end,” said Justin Lederer, an interest-rate strategist at in New York Cantor Fitzgerald LP, one of 22 primary dealers that trade with the Fed. “If the data continues to hold steady, rate-hike expectations will continue to push up the two-year note yield.”
The benchmark 10-year yield rose two basis points, or 0.02 percentage point, to 2.63 percent at 5 p.m. New York time, according to Bloomberg Bond Trader data. It is up from 2.48 percent at the end of May. The price of the 2.5 percent note due May 2024 fell 6/32, or $1.88 per $1,000 face value, to 98 29/32.
Treasury trading volume fell to $191 billion, the least since May 23 and the third straight decline, according to ICAP Plc, the largest inter-dealer broker of U.S. government debt. The average daily volume over the past year is $317 billion.
“The market is just plain worn out -- hard to make money being long or short,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc., referring to bets Treasuries would rise or fall. “Choppy, small-range trade on low volume, doesn’t take much to move it around.”
Two-year notes yielded 0.508 percent in when-issued trading before tomorrow’s auction, which would be the highest since the May 2011 sale yielded 0.56 percent. Yields on current two-year notes were 0.47 percent.
“There should be decent demand at the auction at these cheaper yields, with quarter-end nearing,” Cantor Fitzgerald’s’ Lederer said. “All across the curve, the market is consolidating -- until there is reason to make a big move one way or the other. The Fed is still in easing mode, which caps yields.”
The Treasury will sell $35 billion of five-year securities on June 25 and $29 billion of seven-year debt the next day. It will also auction $13 billion of two-year floating-rate notes on June 25.
Fed policy makers at their June 17-18 meeting cut monthly debt purchases by $10 billion, to $35 billion, while leaving the target rate for overnight lending between banks in the range of zero to 0.25 percent, where it has been since December 2008.
There is a 60 percent chance the Fed will raise rates to at least 0.5 percent by July of next year, based on fed funds futures, versus a 43.2 percent chance at the end of May.
Treasury 10-year notes yielded 130 basis points more than Germany’s 10-year bunds, the most since June 1999, as European Central Bank President Mario Draghi signaled in an interview published in Dutch newspaper De Telegraaf on June 21 that rates will probably remain low for at least 2 1/2 years.
“That Treasuries are still trading so cheap relative to what you can get in Europe continues to keep U.S. debt so well bid, especially when you factor in the lack of growth or inflation pressures,” said Thomas Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “The major question this week will be how well the auctions go will after last week’s Federal Open Market Committee meeting.”
The gap will widen to 137 basis points by the end of this year, according to the weighted average of analyst estimates compiled by Bloomberg.
The U.S. 10-year break-even rate, which measures the difference between yields on benchmark notes and similar-maturity Treasury Inflation Protected Securities, reached 2.28 percentage points, the most since Jan. 13. The gauge represents the bond market’s forecast for the pace of consumer-price increases during the life of the debt and has climbed from 2.21 on May 30.
Treasuries fell today as home purchases climbed 4.9 percent, the biggest increase since August 2011, to a 4.89 million annualized rate, figures from the National Association of Realtors showed today in Washington.
Government data due on June 26 will show the Fed’s preferred measure of inflation rose to the highest since October 2012, analysts forecast.
The Fed’s 2 percent inflation goal is based on the personal consumption expenditures price index, which rose 1.8 percent last month from a year earlier, according to the median estimate of economists and strategists in a Bloomberg survey before the data on June 26. That’s after a 1.6 percent gain in April.
“We have several Fed speakers and we’ll get to hear what they have to say after the FOMC meeting last week, where it seemed as though the Fed discounted the uptick in inflation,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “They’ll have a chance to spin it how they see fit.”