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

The Treasury sold $30 billion of two-year notes at the highest yield in more than three years as investors bet the economy will be strong enough for the Federal Reserve to remain on pace to raise interest rates next year.

The securities were sold at a yield of 0.511 percent, the most 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 debt offered, was 3.23, the lowest since March versus an average of 3.39 at the past 10 sales.

There is a 60 percent probability 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. Following their June 17-18 policy meeting, Fed officials released forecasts, represented as dots on charts, showing that starting next year interest-rates would rise from zero faster than previously expected.

“We’ve had a decent concession of the last few days and yields at 50 basis points helped bring in some interest,” said Thomas Simons, a government-debt economist in New York at Jefferies Group LLC, one of 22 primary dealers that bid at Treasury auctions. “As we get closer to the Fed raising rates, we will drift higher.”

The yield on the current two-year note was little changed at 0.47 percent at 2:14 p.m. in New York, according to Bloomberg Bond Trader Prices. The yield on the benchmark 10-year note fell three basis points to 2.59 percent.


Indirect bidders, an investor class that includes foreign central banks, purchased 23.1 percent of the notes, compared with an average of 26.2 percent for the past 10 sales.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 23.3 percent of the notes at the sale, compared with an average of 24.4 percent for the past 10 auctions.

Two-year notes have returned 0.3 percent this year, compared with a gain of 2.6 percent by the broad Treasuries market, according to Bank of America Merrill Lynch indexes. The two-year securities advanced 0.3 percent in 2013, while Treasuries fell 3.4 percent.

Fed policy makers said on June 18 that they expect their year-end rate will reach 1.13 percent in 2015 and 2.5 percent in 2016. Trading in the futures and swaps markets indicate the benchmark rate will remain below 2 percent through March 2017.

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

The sales, plus a $7 billion offering of 30-year Treasury Inflation Protected Securities on June 19, will raise $40.6 billion of new cash, as maturing securities held by the public total $73.4 billion, according to the U.S. Treasury.