Treasury Notes Decline as Demand Wanes Amid Gains in Oil, Stocks

  • Yields on two-year securities climb to highest since Feb. 1
  • Traders rebuild wagers that the Fed will raise rates this year

Treasury notes fell, pushing two-year yields to the highest in three weeks, as a rally in oil and global equities reduced demand for haven assets.

The two-year yield, the maturity most sensitive to Federal Reserve monetary policy, climbed as investors rebuilt wagers that officials will raise interest rates this year. Crude prices advanced for the third time in four days after falling to a 12-year low this month. The U.S. will sell $26 billion of two-year securities Tuesday in the first of three note auctions this week.

"You had this big fear trade and it’s calmed down to some degree," said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. The market will need "better economic data to get much higher yields. We were well overbought and are back to neutral levels."

A bond-market gauge of inflation expectations known as the the 10-year break-even rate rose for a second day after it fell on Feb. 10 to the lowest since March 2009. Futures indicate about a 46 percent chance the Fed will follow its December rate increase with another in 2016, up from an 11 percent probability assigned on Feb. 11. The calculation is based on the assumption that the effective fed funds rate will trade at the middle of the new target range after the next increase.

U.S. two-year yields rose one basis point, or 0.01 percentage point, to 0.75 percent as of 5 p.m. in New York, the highest on a closing basis since Feb. 1, according to Bloomberg Bond Trader prices. The price of the 0.75 percent note due January 2018 was 100.

Inflation Gauges

Benchmark 10-year note yields rose one basis point to 1.75 percent. The 30-year bond yield was little changed at 2.6 percent.

"Momentum continues to favor higher yields," said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. "It’s a general risk-on sentiment."

A report Feb. 26 will show an inflation gauge preferred by the Fed climbed at an annual rate of 1.2 percent, based on a Bloomberg survey of economists. The Fed targets a 2 percent inflation rate. Consumer prices in the U.S. excluding food and fuel increased in January by the most in more than four years, government data showed last week.

The U.S. will sell $34 billion in five-year notes Wednesday and $28 billion in seven-year notes the next day.

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