Treasuries Fall as Week's Sales to Tally More Than $100 Billion

  • Futures signal 72% chance of Fed liftoff in December
  • U.S. to issue more than $100 billion of notes this week

Two-year Treasury yields held close to a five-year high as the U.S. government sold $26 billion of the maturity while speculation mounts that the Federal Reserve is poised to raise interest rates within weeks.

Monday’s two-year auction drew a yield of 0.948 percent, the highest since April 2010, and a gauge of demand for the sale was the strongest since September. Yet the buying wasn’t enough to push down two-year yields with the Fed’s Dec. 16 decision looming. San Francisco Fed President John Williams said Nov. 21 there’s a “strong case” for an increase in December.

With Fed officials signaling they plan to raise borrowing costs slowly after liftoff and investors’ inflation expectations tame, longer-term U.S. government debt extended a two-week advance. The gap between yields on two- and 10-year maturities shrank to the smallest since March on a closing basis. The dwindling spread -- known as a flattening of the yield curve -- indicates traders are confident inflation and economic growth will remain in check.

The shift in the yield curve "speaks to the market’s disbelief that the Fed will be able to enact a steep pace of hikes," said Aaron Kohli, a fixed-income strategist in New York for Bank of Montreal, one of the 22 primary dealers that trade with the Fed.

2010 Levels

Benchmark two-year yields were little changed at 0.92 percent as of 5 p.m. New York time, according to Bloomberg Bond Trader data. The price of the 0.75 percent security due in October 2017 was 99 21/32. The yield reached 0.95 percent -- the highest since 2010 -- on Nov. 6, the day the U.S. released a report showing surging job growth.

Ten-year notes yielded 2.24 percent, or about 1.32 percentage points more than two-year yields. The five-year average for the gap is about 1.9 percentage points.

The U.S. is scheduled to sell more than $100 billion combined of two-, five- and seven-year notes this week, which is shortened by the U.S. Thanksgiving Day holiday Nov. 26.

At Monday’s auction, the bid-to-cover ratio, which gauges demand, rose to 3.15, the highest since the September auction. Indirect bidders, a group that includes foreign central banks, bought 45.7 percent, compared with 40 percent in the prior auction. Primary dealers bought 35.3 percent, compared with 48.9 percent in the previous sale. Direct bidders purchased 19 percent.

Overseas Support

"To get support form both overseas and large direct accounts is helpful," said Jim Vogel, head of interest-rate strategy at FTN Financial in Memphis, Tennessee. “It shows everybody’s not focused on a runaway Fed, just a re-normalizing Fed."

A Bloomberg survey of economists suggests yields are poised to rise in the weeks ahead. The 10-year yield will rise to 2.32 percent by year-end, according to the median forecast in the poll.

There’s a 72 percent chance of the Fed increasing borrowing costs next month, the highest probability since August, futures data compiled by Bloomberg show. The calculations are based on the assumption the effective fed funds rate will average 0.375 percent after liftoff, compared with the current zero to 0.25 percent target range.

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