Treasuries Remain Lower as Fed Releases Minutes

Treasuries remained lower after the Federal Reserve released minutes of its June Federal Open Market Committee meeting.

U.S. government debt dropped earlier after the U.S. sold $21 billion of 10-year securities attracted below-average demand. Investors are trying to gauge the central bank’s view of strength in the economy after a report last week showed employers added more jobs in June than analysts predicted, while hourly earnings growth slowed. The U.S will sell $13 billion of 30-year bonds tomorrow.

The benchmark U.S. 10-year yield rose four basis points, or 0.04 percentage point, to 2.60 percent at 2:02 p.m. New York time, according to Bloomberg Bond Trader prices. The 2.5 percent note due May 2024 fell 10/32, or $3.13 per $1,000 face amount, to 99 5/32. The yield dropped to 2.55 percent yesterday, the lowest since July 2.

Ten-year Treasuries have returned 5.7 percent this year through yesterday, compared with 2.9 percent for the broad market, according to Bank of America Merrill Lynch indexes.

Yield Difference

The gap between yields on U.S. five-year notes and 30-year bonds narrowed for a fourth day to reach 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.

The 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.

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.

Other reports last week revealed the uneven nature of the recovery. Average hourly earnings increased 2 percent in June from the year before, versus 2.1 percent in May and 2.7 percent five years earlier. Treasuries also rose yesterday as a decline in stocks around the world drove demand for the relative safety of sovereign debt.

Traders see a 79 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.

“Ultimately, rates do go higher as we get closer to a liftoff date,” said Justin Lederer, an interest-rate strategist in New York at Cantor Fitzgerald LP, one of 22 primary dealer that trade with the Fed.

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