Treasuries Fall On Forecast Of Drop In Fed Bond-Buying

Washington (July 28) Treasuries fell, with two-year yields reaching the highest level in almost three weeks, as Federal Reserve policymakers prepare to start a two-day meeting where they are forecast to reduce monthly bond-buying.

The difference between five- and 30-year yields touched the narrowest since 2009 as subdued inflation supported longer maturities. The Federal Open Market Committee will scale back its monthly debt purchases to $25 billion from $35 billion on July 30, according to economists surveyed by Bloomberg. The Treasury sold $29 billion of two-year notes at the highest auction yield since May 2011.

"Nobody wants to get in the front end when there could be a market-moving event coming up," said Thomas Simons, a government debt economist in New York at Jefferies Group, one of the 22 primary dealers that trade with the Fed. "The FOMC could move the front end a little bit."

The benchmark 10-year note yield rose two basis points, or 0.02 percentage point, to 2.49% at 4:59 p.m. ET, according to Bloomberg Bond Trader data. The 2.5% security due in May 2024 fell 5/32, or $1.56 per $1,000 face amount, to 100-1/8.

The gap between five- and 30-year yields narrowed to 154 basis points, the least since January 2009.

The current two-year note yield touched 0.5%, the highest level since July 9.

The amount of Treasuries traded through Icap, the largest interdealer broker of U.S. government debt, rose to $218.7 billion, from $215.6 billion on July 25. The daily average volume this year is $325 billion.

The two-year notes auctioned today yielded 0.544%, compared with a forecast of 0.543% in a Bloomberg News survey of seven of the Fed's primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.22, compared with an average of 3.39 for the past 10 sales.

"Determining the path to exit easing would be one of the reasons why people are wary of the two-year and are willing to let yields plunge the way that we've seen," said Aaron Kohli, an interest rate strategist BNP Paribas in New York, a primary dealer.

Indirect bidders, an investor class that includes foreign central banks, purchased 27% of the notes, compared with an average of 26.6% for the past 10 sales.

Direct bidders, nonprimary-dealer investors that place their bids directly with the Treasury, purchased 14.3% of the notes at the sale, the least since June 2013 and compared with an average of 24.1% for the past 10 auctions.

Source: NewsInvestors