Treasury 10-Year Yields Near Two-Week Low as Sale Draws Demand

  • Five-year sale's bid-to-cover ratio is highest since September
  • Sovereign debt got boost after Russian warplane shot down

Treasury 10-year yields held near a two-week low as climbing demand at a note auction signaled investors are embracing the Federal Reserve’s message that it plans to lift interest rates only gradually.

Demand at Tuesday’s $35 billion sale of five-year securities was the strongest since September as the highest yields since June on the maturity lured investors. Bidders who buy directly from the Treasury bought the most in more than a year.

Sovereign debt across the world got a boost as investors sought the relative safety of fixed-income assets after Turkish forces on the Syrian border shot down a Russian warplane. In the U.S., longer-maturity obligations are extending their rally to a third straight week as Fed policy makers have signaled a possible rate boost as soon as December and that additional increases would occur gradually.

“There’s a little bit better buying of Treasuries, which I expect to persist throughout the end of the year and further even in the face of a Fed rate hike," said Guy Haselmann, head of capital market strategy at Bank of Nova Scotia in New York.

Benchmark U.S. 10-year notes yielded 2.24 percent as of about 5 p.m. New York time, according to Bloomberg Bond Trader data. The price of the 2.25 percent security due in November 2025 was 100 3/32. The yield touched the lowest since Nov. 4 on Tuesday.

Rising Ratio

The offering of five-year Treasuries drew a yield of 1.67 percent. The bid-to-cover ratio, a gauge of demand, was 2.52, the highest in two months. A two-year note auction Monday drew the highest yield since 2010, reflecting expectations among traders for rising interest rates as the Fed’s next policy decision looms on Dec. 16.

A group known as indirect bidders, investors that include foreign central banks and mutual funds, purchased more than half of the five-year securities. Direct bidders took down 10.1 percent of the securities, the most since October 2014.

U.S. Treasury note sales this week are set to tally more than $100 billion, with a $29 billion offering of seven-year obligations ahead Wednesday, before the U.S. Thanksgiving Day holiday Nov. 26.

Fed Bets

The market implied probability of a Fed move in December is at 74 percent, close to the highest since August, based on the assumption that the effective fed funds rate will average 0.375 percent after liftoff, compared with the current range of zero to 0.25.

With bets mounting that a Fed move is imminent and inflation expectations tame, longer maturities have outperformed shorter-dated Treasuries in recent weeks. The extra yield investors demand on 10-year debt over two-year notes shrank to 130 basis points Tuesday, the least since February on a closing basis.

Sliding commodities prices have helped lower inflation expectations. Oil has slumped more than 40 percent from a year ago. The Fed’s preferred price-growth gauge has been below its 2 percent goal since 2012. The measure probably rose 0.3 percent in October from a year earlier, according to the median forecast in a Bloomberg survey before the data’s release Wednesday.

"The curve still reflects a market that doesn’t believe that liftoff is going to bring us any closer to additional rate hikes down the road," said Tom Simons, a government-debt economist in New York at Jefferies Group LLC.

Before it's here, it's on the Bloomberg Terminal.