U.S. Two-Year Notes Poised for Biggest Weekly Gain Since 2011

Treasuries gained, with two-year yields set for the biggest weekly drop in more than three years, as investors pared expectations for interest-rate increases after the Federal Reserve highlighted risks to the U.S. economy.

Two-year yields, among the most sensitive to rate expectations, dropped 11 basis points this week, the largest slide outside of Hong Kong among 22 developed markets tracked by Bloomberg. The U.S. 10-year yield fell to the lowest in more than a month relative to its Group-of-Seven counterparts yesterday. Pacific Investment Management Co.’s $202 billion Total Return Fund, which was managed by Bill Gross until his Sept. 26 departure, cut holdings of government debt last month.

“The recent move in shorter-term Treasuries shows that the market has postponed expectations for rate hikes,” said Tomohisa Fujiki, head of interest-rate strategy for Japan at BNP Paribas SA in Tokyo. “The Fed has highlighted weaker external growth, which could affect the U.S., as well as concern over the strong U.S. dollar.”

The U.S. two-year yield was little changed at 0.46 percent at 7:16 a.m. in London, according to Bloomberg Bond Trader data. Its decline this week is the most since April 15, 2011. The price of the 0.5 percent note due September 2016 was 100 3/32. The 10-year yield was at 2.32 percent and has fallen 11 basis points since Oct. 3.

Japan’s 10-year yield rose one basis point to 0.495 percent. Australia’s climbed three basis points to 3.33 percent. A basis point is 0.01 percentage point.

Growth Concern

A number of U.S. central bank officials said the nation’s expansion “might be slower than they expected if foreign economic growth came in weaker than anticipated,” according to minutes of the Sept. 16-17 Federal Open Market Committee meeting released this week in Washington.

Traders see a 57 percent chance the Fed will raise its benchmark rate by its September 2015 meeting, fed funds futures data compiled by Bloomberg showed yesterday. That compares with 78 percent odds seen on Sept. 30.

BNP predicts the 10-year Treasury rate will climb to 2.9 percent by Dec. 31, Fujiki said.

The extra yield benchmark U.S. notes offered over their G-7 peers shrank to 0.77 percentage point yesterday, the least since Sept. 3. The spread between yields on 10-year Treasuries and German bunds narrowed to 1.41 percentage points yesterday, the smallest difference since Aug. 19. The yield on German debt due in a decade fell to a record yesterday.

‘Yield Story’

Europe’s low rates are “forcing investors to look at other markets where you still get some yield,” said Su-Lin Ong, head of Australian economic and debt strategy at Royal Bank of Canada in Sydney. “Real money has been buying Treasuries and that, I think, is a function of the yield story.”

Bank of America Merrill Lynch’s MOVE Index, which measures price swings in Treasuries based on options, rose to 66.47 basis points yesterday, the highest since Sept. 16. The amount of Treasuries traded through ICAP Plc, the largest inter-dealer broker of U.S. government debt, was $525 billion yesterday after climbing to $563 billion on Oct. 8, the most since May 2.

Pimco’s Total Return Fund, the world’s largest bond mutual fund, reduced holdings of government-related debt to 38 percent in September from 41 percent the previous month, data posted on the company’s website showed. The category, which is the largest portion of the fund, includes holdings of U.S. Treasury notes, bonds, agency debt, interest-rate swaps and inflation-protected securities.

The fund has returned 4.14 percent this year, trailing 59 percent of its peers.

(An earlier version of this story was corrected to say notes instead of yield gained in headline.)

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