Bond Prices Dip As Demand At 2-Yr. Note Auction Falls - Investor's Business Daily

Treasuries fell for the first time in three days as an auction of U.S. two-year notes attracted lower-than-average demand with the Federal Reserve likely moving closer to winding down its asset-purchase program.

The bid-to-cover ratio on the $ 35 billion in notes, which gauges demand by comparing total bids with the amount of securities offered, was 3.08, compared with an average of 3.54 for the past 10 sales. The Fed will start trimming its $ 85 billion in monthly bond purchases in September, according to a survey of economists by Bloomberg News released today. The U.S. will sell $ 35 billion in five-year debt tomorrow and $ 29 billion in seven-year securities on July 25.

“The market is settling back into the fact that tapering is going to occur,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “The market is defining 2.50% on 10s as a level that kind of makes sense.”

The U.S. 10-year yield rose three basis points, or 0.03 percentage point, to 2.51% at 5 p.m. ET, according to Bloomberg Bond Trader prices. The 1.75% note due in May 2023 fell 6/32, or $ 1.88 per $ 1,000 face amount, to 93-15/32.

The current two-year note yield was little changed at 0.31%.

Treasury trading volume at ICAP, the largest inter-dealer broker of U.S. government debt, was $ 246.7 billion, up from $ 194 billion yesterday, the highest level since July 5. The 2013 average is $ 318.8 billion.

Volatility in Treasuries as measured by the Merrill Lynch Option Volatility Estimate MOVE Index was at 74.05, up from Monday’s 72.62, the lowest level since May 24. The figure is down from 117.89 on July 5, the highest since December 2010. The one-year average is 64.8.

Today’s two-year note auction drew a yield of 0.336%, compared with a forecast of 0.338% in a Bloomberg News survey of seven of the Federal Reserve’s 21 primary dealers.

Demand as measured by the ratio of bids to debt sold was “lighter” than average, said Thomas di Galoma, head of U.S. rates sales at ED&F Man Capital Markets in New York. “The five-year’s going to be a little more difficult just because the five-year sector has rebounded off its lows.”

Two-year notes have gained 0.1% this year, compared with a decline of 2.3% 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%.

Investors have bid $ 2.93 for each dollar of the $ 1.193 trillion in U.S. government notes and bonds sold at auction so far this year, according to Treasury data compiled by Bloomberg.