The yield on the five-year note dropped for a second day before the U.S. sells $35 billion of the debt even after Federal Reserve Chair Janet Yellen said last week the central bank may raise interest rates from zero sooner than policy makers estimate if labor markets keep improving. The U.S. will also sell $13 billion of two-year floating-rate debt today.
“The rally is being led by what’s going on in Europe and the bond markets there,” said Charles Comiskey, New York-based head of Treasury trading at Bank of Nova Scotia in New York, one of 22 primary dealers that are obligated to bid in U.S. debt auctions. “The Fed is in play, so you’d best be out the curve a bit in the seven- to 10-year sector, as long as there are no hiccups with inflation.”
The Treasury 10-year yield dropped three basis points, or 0.03 percentage point, to 2.36 percent at 8:54 a.m. New York time, according to Bloomberg Bond Trader data. The 2.375 percent note maturing in August 2024 rose 9/32, or $2.81 per $1,000 face amount, to 100 3/32.
Two-year rates fell one basis point to 0.51 percent. The spread between the two securities fell to as low as 185 basis points today, the least since June 2013.
The five-year notes being sold today yielded 1.66 percent in pre-auction trading. At the previous auction on July 29, investors bid for 2.81 times the amount available, the highest since March at the monthly sales.
Direct bidders, non-primary-dealer investors that place bids directly with the Treasury, bought 25.9 percent of the notes on offer, the most since December 2012. Indirect bidders, the investor class that includes foreign central banks, purchased 48.2 percent, the least in three months.
The last sale of two-year floating-rate debt drew bids for 4.09 times the amount offered, the lowest level since the government began selling the notes in January.
The U.S. is scheduled to sell $29 billion of seven-year securities tomorrow. Yesterday’s two-year sale drew a yield of 0.53 percent, compared with 0.544 percent at the previous auction of the securities in July, which was the highest since May 2011.
The extra yield on Treasuries over their Group of Seven counterparts was at 80 basis points after closing yesterday at 79 basis points, the widest since June 2007.
“Some investors in Europe are buying Treasuries to seek better yields because of the economic and Fed’s policy outlook,” said Alessandro Giansanti, a senior rates strategist at ING Groep NV in Amsterdam. “The Treasury curve is likely to maintain its flattening trend amid speculation the Fed is heading for a tighter policy.”
The difference, or spread, between two-year notes and benchmark 10-year securities narrowed to the least in more than a year.
A yield curve is a chart showing rates on bonds of different maturities. A so-called flatter curve suggests some investors expect short-term interest rates to rise.
Durable goods orders jumped by a record 22.6 percent in July, surpassing the median estimate of 8 percent growth in a Bloomberg News survey, the Commerce Department said yesterday. The Citigroup Economic Surprise Index climbed to 27.3, the highest level since Feb. 5. A positive number means data releases have been stronger than expected.
The U.S. economy expanded at a 3.9 percent annualized rate in the second quarter, according to a separate Bloomberg survey before the Commerce Department releases the revised figures tomorrow. The economy shrank 2.1 percent in the first three months of the year, the largest contraction since the first quarter of 2009.
Yellen’s comments made in Jackson Hole, Wyoming, on Aug. 22, added to speculation the central bank is preparing to boost interest rates next year. The majority of Fed officials predict the central bank will start raising borrowing costs in 2015 based on forecasts it published in June.
Traders saw about a 53 percent chance the Fed will increase its benchmark rate from the current range of zero to 0.25 percent by July 2015, according to futures data compiled by Bloomberg.
The difference between yields on 10-year notes and similar- maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt, was little changed at 2.15 percentage points. The average for the past decade is 2.20.