Treasuries Gain as Fed Minutes Ease Concern on Rate Rise Timing

Treasuries rose, with two-year note yields falling to a one-week low, after the Federal Reserve June meeting minutes reduced concern the central bank may accelerate plans for higher interest rates next year.

U.S. government debt dropped earlier amid speculation the central bank would reveal details for an exit from unprecedented monetary stimulus. The difference between yields on five- and 30-year debt touched the least since 2009, reflecting the outlook for the Fed to still increase interest-rates next year while long-term inflation remains modest. Treasuries fell earlier as the sale of $21 billion of 10-year securities attracted below-average demand.

“There was more hawkishness expected from the Fed minutes, and that’s not what we got,” said Christopher Sullivan, who oversees $2.3 billion as chief investment officer at United Nations Federal Credit Union in New York.

The yield on the two-year note fell three basis points, or 0.03 percentage point, to 0.48 percent at 4:59 p.m. New York time, according to Bloomberg Bond Trader prices. The 0.5 percent note due June 2016 rose 2/32, or $0.63 per $1,000 face amount, to 100 1/32. The yield reached 0.47 percent, the lowest level since July 2.

Benchmark Note

The current 10-year yield fell one basis point to 2.55 percent. It dropped as low as 2.54 percent, the least since July 1, after rising as much as four basis points, or 0.04 percentage point, earlier.

The amount of Treasuries traded through Icap Plc, the largest inter-dealer broker of U.S. government debt, rose to $378 billion, the most since June 19. The daily average volume this year is $333 billion.

The gap between yields on U.S. five-year notes and 30-year bonds reached 1.64 percentage points, the least since March 2009 as investors anticipate interest rates will rise in a slow-growth and low-inflation environment. The yield curve measures securities of different maturities.

“We can continue to see that as short and intermediate yields move higher,” said Collin Martin, a senior fixed-income analyst in New York at Charles Schwab & Co., in a telephone interview. “With growth still low and inflation still fairly modest, we don’t think we’ll see long term yields necessarily move significantly higher, so the flattening trend will continue.”

Auction Outcome

The 10-year notes sold today drew a yield of 2.597 percent, the lowest at auction since June 2013 and compared with a forecast of 2.585 percent in a Bloomberg News survey of nine of the Fed’s primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.57, compared with an average of 2.72 for the previous 10 sales.

“The auction was a bit weaker given the rally over the last few days,” said Sean Murphy, a trader in New York at the primary dealer Societe Generale SA. “We were a little overbought and didn’t have much of a concession.”

Indirect bidders, an investor class that includes foreign central banks, purchased 39.6 percent of the notes, compared with an average of 44.2 percent for the past 10 sales.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 13.9 percent of the notes, compared with an average of 19.4 percent at the last 10 auctions.

The Treasury auctioned $27 billion of three-year notes yesterday. The U.S will sell $13 billion of 30-year bonds tomorrow.

Fed Watch

Investors are adding to bets the Fed will raise borrowing costs next year after the U.S. reported last week that employers hired 288,000 workers in June, compared with the 215,000 projected by a Bloomberg News survey of economists.

“Signs of increased risk-taking were viewed by some participants as an indication that market participants were not factoring in sufficient uncertainty about the path of the economy and monetary policy,” the Fed’s June minutes showed.

Fed officials also agreed that their bond-purchase program would end with a final reduction of $15 billion in buying at their October meeting if the economy progresses as they expect. At its June meeting, the central bank continued cutting the monthly pace of asset purchases, reducing it by $10 billion for a fifth straight meeting, to $35 billion.

Traders see a 77 percent chance the Fed will raise its key rate by September 2015, compared with about 50 percent at the end of May, federal fund futures contracts show. The central bank has kept its target for the benchmark fed funds rate in a range of zero to 0.25 percent since December 2008.

“The Fed is going to be pretty dovish - until there’s some big change,” said Kris Kowal, managing director, fixed income and chief investment officer at DuPont Capital Management, in Wilmington, Delaware. Kowal helps to oversee $10 billion in fixed-income assets.

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