Treasury yields fall to lowest in 6 weeks on Fed stimulus policy

Treasury 10-year note (CBOT:ZNZ13) yields fell to the lowest level in six weeks as investors bet the Federal Reserve will maintain monetary stimulus as it awaits a pick-up in economic growth, stoking demand for government debt.

Treasuries remained higher as the U.S. sold $33 billion of two-year notes at a yield of 0.348%, below a forecast of 0.354% in a Bloomberg News survey of seven of the Federal Reserve’s 21 primary dealers. The Fed last week maintained its policy of buying $85 billion of debt a month to put downward pressure on borrowing costs, causing investors to push back forecasts for when the central bank will raise interest rates.

There’s a “gradual acceptance by the market that the Fed will remain accommodative,’ said Aaron Kohli, an interest-rate strategist in New York at BNP Paribas SA, a primary dealer. ‘‘The market is going to be grinding to lower yields over the next few months.’’

The benchmark 10-year note yield fell four basis points, or 0.04 percentage point, to 2.66% at 2:12 p.m. in New York, based on Bloomberg Bond Trader data, after declining five basis points in the previous two trading days. The yield touched 2.64%, the lowest since Aug. 13. The price of the 2.5% security due in August 2023 added 3/8, or $3.75 per $1,000 face value, to 98 20/32.

Auction Participation

At the two-year note auction, indirect bidders, an investor class that includes foreign central banks, purchased 24% of the notes, compared with an average of 24.1% for the past 10 sales.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 21.8% of the notes at the sale, compared with an average of 22.6% for the past 10 auctions.

‘‘It was a solid auction all the way through -- shorts are getting squeezed with the Fed now not in play with tapering,’’ said Michael Franzese, senior vice president of fixed-income trading at ED&F Man Capital Markets in New York. ‘‘There’s a certain amount of give-back. This is a reflection of people having money to invest.’’ A short position is a bet an asset will decline in value.

Two-year notes have gained 0.2% this year, compared with a decline of 2.9% by Treasuries overall, according to Bank of America Merrill Lynch indexes. The two-year securities returned 0.3% in 2012, while Treasuries overall rose 2.2%.

The sales this week, along with last week’s $13 billion 10- year TIPS auction, will raise $47.6 billion of new cash, as maturing securities held by the public total $62.3 billion, according to the Treasury.

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