Two-year notes (CBOT:ZTM14) yielded their highest since May 2011 in when-issued trading before the Treasury’s $30 billion sale of the securities. Federal Reserve Bank of Philadelphia President Charles Plosser said inflation will “stabilize” next year at about 2%, the Fed’s target, amid speculation an uneven economic recovery will prompt policy makers to keep interest rates low longer. Bank of England Governor Mark Carney damped speculation of a rate increase. German business confidence fell.
“There are still global growth issues that continue to concern central banks and give Treasuries support,” said Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York. “Ultimately the inflation outlook will be the main driver this week as the numbers come in. There is a debate between the Fed’s outlook and the market’s outlook, and it’s not clear which side will win out.”
Benchmark 10-year yields dropped three basis points, or 0.03 percentage point, to 2.60% at 9:31 a.m. New York time, according to Bloomberg Bond Trader data. The 2.5% note maturing in May 2024 climbed 9/32, or $2.81 per $1,000 face amount, to 99 5/32. The rate has increased from 2.48% at the end of last month.
The two-year notes scheduled for sale today yielded 0.50% in pre-auction trading, which would be the highest since an offering in May 2011 yielded 0.56%. The rate on the current two-year note was 0.46% today. That’s below 0.49% forecast for the end of the second quarter by analysts in a Bloomberg survey.
Investors bid for 3.52 times the amount of notes on offer at a previous auction on May 27, compared with 3.35 in April. Indirect bidders, the category of investors that includes foreign central banks, purchased 18.9%, down from 23.4%. Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 25.2%.
The U.S. is selling $107 billion of coupon-bearing debt this week. It will offer $35 billion of five-year notes (CBOT:ZFM14) tomorrow and $29 billion of seven-year securities the following day. It will auction $13 billion of two-year floating-rate debt tomorrow.
The pound (CME:B6M14) fell after Carney told lawmakers there’s “more spare capacity in the labor market than we had thought” and that the timing of any interest-rate increase “will be driven by the data.”
This came less than two weeks after Carney indicated the BOE’s benchmark might rise from a record low earlier than investors anticipated. One lawmaker said the governor was acting like an “unreliable boyfriend” and leaving businesses and consumers in an uncertain position.
“Carney was much more dovish after earlier suggesting rate hikes would come sooner than expected,” GMP’s Miller said. “And German data overnight was weak, which is giving the market a reason to hold in as we await U.S. data.”
The Ifo institute’s German business climate index, based on a survey of 7,000 executives, declined to 109.7 in June from 110.4 in May. Economists predicted a drop to 110.3, according to a Bloomberg News survey.