Treasury 2-Year Notes Set to Be Sold at Highest Yield Since 2011

Treasuries fell as the U.S. prepared to sell $27 billion of two-year notes at the highest auction yield since 2011 with investors demanding a bigger premium with the Federal Reserve forecast to raise rates next year.

Longer-term U.S. debt led declines as the central bank said last week it will be “patient” on the timing of the first rate increase since 2006, replacing a pledge to keep borrowing costs low for a “considerable time.” The U.S. is scheduled to sell $104 billion of notes this week. Treasuries are set for their best year since 2011, according to the Bloomberg World Bond Indexes.

“The Fed is going to move rates,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “Given this is the highest level we’ve seen in three years, people are willing to put their money where they think that they can get the best yield and that’s in the U.S. That type of buying will be here.”

The current two-year note yield rose one basis point, or 0.01 percentage point, to 0.65 percent, at 11:04 a.m. New York time, according to Bloomberg Bond Trader data. The 0.5 percent securities maturing in November 2016 fell 1/32, or 31 cents per $1,000 face amount, to 99 22/32.

The 10-year note yield added two basis points to 2.18 percent.

Market Prices

The two-year notes to be sold today traded at 0.700 percent in pre-auction trading, the highest since March 2011.

U.S. government securities have returned 6.1 percent in 2014, according to the Bloomberg U.S. Treasury Bond Index. They lost 3.4 percent last year.

The chances of a Fed interest-rate increase by its September 2015 meeting increased to 64 percent from 53 percent on Dec. 16, the day before the Federal Open Market Committee issued its policy statement, according to futures data. The central bank is poised to raise rates as U.S. economic data strengthens, and even as inflation remains below its 2 percent target.

A report tomorrow is forecast to show durable goods orders rose in November by 3 percent, the fastest pace since July. Meanwhile the core personal consumption expenditure index slowed to 1.5 percent in the 12 months ending in November, from 1.6 percent the previous month, according to forecasters in a Bloomberg News survey before the report tomorrow.

Inflation Watch

Market inflation expectations, as measured by the difference between the yields on 10-year notes and equivalent maturity inflation-indexed securities, were at 1.71 percentage points. The gauge reached 1.58 percentage points on Dec. 16, the least since 2010.

“The Fed is willing to move forward with normalizing rates, even with the current levels of inflation,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “If inflation expectations reduce in the first half of next year, the Fed may need to rethink their tightening expectations. However, the bar to add additional accommodation is high.”

In addition to today’s sale, the U.S. will auction $35 billion of five-year securities and $13 billion of two-year floating-rate notes tomorrow and $29 billion of seven-year debt on Dec. 24.

The Treasury market will close Dec. 25 in observance of the Christmas holiday, according to the Securities Industry and Financial Markets Association’s website. The group recommends an early close on Dec. 24 at 2 p.m. New York time.

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