A two-year U.S. government note auction on Tuesday attracted the strongest overall demand since November despite concerns over a potential interest-rate increase by the Federal Reserve this summer.<\/p>\n
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Yields on short-term debt are highly sensitive to the Fed\u2019s policy outlook. The two-year note\u2019s yield has climbed this month as a number of Fed officials warned that a rate increase in June isn\u2019t off the table. Before the auction, the yield reached the highest intraday level since mid-March. Yields rise as bond prices fall.<\/p>\n
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Higher yields attracted buyers into the $26 billion sale, the first leg of this week\u2019s new government note auctions. The direct bidding, which includes buying from large U.S. institutional investors, jumped to 32.5%\u2014the second largest amount of all time behind the 38.2% figure in the October 2012 sale, according to Jefferies LLC.<\/p>\n
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Foreign demand was also firm as reflected by the 49.8% indirect bidding. While the notes were sold at a slim yield of 0.92%, that represents a steal compared with negative yields investors get from comparable government bonds in Germany and Japan.<\/p>\n
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The strong auction surprised some bond traders who thought that bidding should be constrained given the Fed\u2019s jawboning lately.<\/p>\n
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Yet money managers have said the bond market has adjusted to the prospect of a moderate rate increase by the Fed. The central bank\u2019s tightening campaign will continue to be slow. That, along with much lower yields overseas, continue to keep a lid on U.S. bond yields.<\/p>\n
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The auction demand was \u2018\u2019unreal,\u2019\u2019 said Tom di Galoma, managing director at Seaport Global Securities LLC. \u201cYields are getting too cheap. There is a lot of cash out\u2019\u2019 chasing fewer high-quality government debts.<\/p>\n
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The auction results gave the bond market a lift, with bond prices paring losses. The yield on the benchmark 10-year note was 1.868%, according to Tradeweb, compared with 1.840% Monday.<\/p>\n
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Fed Chairwoman Janet Yellen will speak at Harvard University on Friday and on June 6 before the World Affairs Council of Philadelphia. ENLARGE<\/p>\n
Fed Chairwoman Janet Yellen will speak at Harvard University on Friday and on June 6 before the World Affairs Council of Philadelphia. PHOTO: ZUMA PRESS<\/p>\n
The two-year note\u2019s yield was 0.909%, down from its session high of 0.93%. The yield was 0.899% Monday.<\/p>\n
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The bond market faces more supply later this week. A $34 billion sale of five-year notes is due Wednesday, followed by a $28 billion sale of seven-year notes Thursday.<\/p>\n
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Selling short-term debt and migrating to longer-term bonds has picked up momentum over the past week as investors adjusted their portfolios to the risk of a near-term tightening act by the central bank.<\/p>\n
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As a result, the yield premium investors demand to hold the 10-year Treasury note relative to the two-year note has fallen lately. On Tuesday, the premium at one point hit 0.93 percentage point, the lowest level since late 2007.<\/p>\n
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In the bond world, a lower premium is known as a flattening yield curve. In the past it was widely interpreted by investors as a sign that the U.S. economy would be losing momentum due to the Fed\u2019s tightening policy.<\/p>\n
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Yet this time, money managers and analysts say the flattening curve is more a reflection of foreign investors\u2019 struggle to obtain income in light of negative yields in Japan and Europe. As they buy long-term U.S. bonds that offer one of the most attractive yields in the developed world, it helps keep long-term U.S. bond yields near all-time lows, even as a robust labor market and some signs of uptick in inflation would have sent yields higher.<\/p>\n
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The U.S. economic growth is \u201cstrong enough\u201d to withstand one or two rate increases from the Fed this year, and the bond market is adjusting to the risk, said Lynn Chen, senior portfolio manager at Aberdeen Asset Management which had $420.9 billion in assets under management at the end of March.<\/p>\n
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Interest-rate futures\u2014a popular tool for hedge funds and money managers to place bets on the Fed\u2019s future policy moves\u2014showed Tuesday that the odds of an interest-rate increase at the Fed\u2019s June 14-15 policy meeting were 38%, according to CME Group. A month ago the probability was zero.<\/p>\n
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The odds for a rate increase at the Fed\u2019s December meeting were 82%, up from 46% a month ago.<\/p>\n
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Fed Chairwoman Janet Yellen will speak at Harvard University on Friday and before the World Affairs Council of Philadelphia on June 6. The June speech will come three days after the May jobs report, and just over a week before the Fed\u2019s June policy meeting.<\/p>\n
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