US Treasuries prices rose on Monday as a solid two-year note auction renewed demand for longer-dated bonds whose yield differences with shorter-dated issues contracted to their smallest levels since August. The strong bidding from investors at the $26 billion two-year debt sale was surprising since shorter-dated issues have been under pressure on the notion that the Federal Reserve will raise interest rates at its policy meeting in December.
That has spurred investors to reduce their shorter-dated debt holdings in favour of longer-dated maturities, flattening the yield curve. "The path of least resistance is for further flattening," said Mike Lorizio, head of Treasuries trading at John Hancock Asset Management in Boston.
The selling of shorter-dated Treasuries was countered by buying from investors attracted by the jump in yields on two-year issues to near the 5-1/2-year highs set in early November, analysts said. Weaker-than-expected data on US home resales in October and losses on Wall Street also rekindled some bids for Treasuries.
"The market is under pressure, but there has been some dip buying," said Justin Lederer, Treasury strategist at Cantor Fitzgerald in New York. Bond prices initially fell with their European counterparts due to encouraging euro zone business data. Comments on Saturday by San Francisco Fed President John Williams, who saw a "strong case" for a rate increase in December, had also weakened bond prices.
Two-year notes were little changed in price for a yield of 0.922 percent, up 1 basis point from Friday. The yield reached 0.958 percent on November 6, which was the highest since May 2010, according to Reuters data. Benchmark 10-year notes were up 4/32 in price to yield 2.246 percent, down nearly 2 basis points. They recovered from an earlier drop of 10/32 and a yield of 2.297 percent.
The yield on the 30-year bond was down 1 basis point at 3.007 percent, holding a 1.32 percentage point premium above the five-year note. That was the slimmest gap between the five-year and 30-year yields since August. The Treasury paid investors a 0.948 percent yield on $26 billion in two-year notes, the highest at a two-year auction since April 2010. It will sell $35 billion of five-year notes on Tuesday and $29 billion in seven-year debt on Wednesday. The US bond market will close on Thursday for the US Thanksgiving holiday and will shut early at 2 pm (1900 GMT) on Friday.
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