Treasury Two-Year Notes Yield Most Versus Germany’s Since 2007

By Susanne Walker and Anchalee Worrachate

Treasury two-year notes yielded the most versus similar-maturity German debt since 2007 as money managers prepared to bid at a $29 billion sale of the U.S. securities today.
Investors (USGG2YR) demanded 52 basis points more to own 2016 securities in the U.S. instead of Germany, after pushing the yield on the German debt down to negative 0.046 percent yesterday. Bond yields from Finland to Italy dropped to records today. The markets are diverging as the U.S. shows signs of growth and the Federal Reserve moves closer to
raising interest rates, while European Central Bank policy makers consider bond purchases to boost economic expansion.
“The European economy is slowing and there’s talk of deflation,” said Dan Mulholland, head of Treasury trading at BNY Mellon Capital Markets in New York. “That’s kept the U.S. market here in check and resulted in lower yields than we may otherwise see.”
The Treasury two-year yield was little changed at 0.5 percent as of 8:33 a.m. in New York, according to Bloomberg Bond Trader data. The price of the 0.5 percent note due in July 2016 was 100. Benchmark 10-year securities yielded 2.38 percent.
The difference between two- and 10-year yields shrank to as little as 187 basis points, the narrowest since June 2013. A basis point is 0.01 percentage point.
If U.S. labor markets keep improving then policy makers may raise rates sooner than traders estimate, Fed Chair Janet Yellen said at the Fed Bank of Kansas City’s annual symposium in Jackson Hole, Wyoming, on Aug. 22.

Auction Outlook

The two-year securities to be sold today yielded 0.525 percent in pre-auction trading, compared with 0.544 percent last month, which was the highest rate since May 2011.
At the previous two-year auction on July 28, investors bid for 3.22 times the amount available, the lowest since March at the monthly sales.
Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 14.3 percent of the notes on offer, the least since June 2013. Indirect bidders, the investor class that includes foreign central banks, bought 27 percent, the most in four months.
Two-year notes have returned 0.5 percent this year, versus 3.9 percent for the wider Treasury market, according to Bank of America Merrill Lynch indexes.
In addition to the two-year sale, the Treasury will auction $35 billion of five-year debt and $13 billion of two-year floating-rate notes tomorrow, and $29 billion of seven-year securities the following day.

Durable Goods

The extra yield U.S. 10-year notes offer over their Group-of-Seven counterparts expanded to 77 basis points yesterday from this year’s low of 37 in February. The spread increased to 78 basis points in July, the most since 2007.
ECB President Mario Draghi, also speaking at Jackson Hole on Aug. 22, said investor expectations for inflation in the euro area have “exhibited significant declines.” Draghi previously said a worsening of the medium-term inflation outlook would provide a reason for broad-based asset purchases.
The ECB introduced a negative deposit rate in June and announced targeted long-term refinancing operations.
“Given the divergence in economic and policy paths between the U.S. and Europe, it is not unreasonable to expect the two-year yield spread to widen further by 30 to 40 basis points in the next nine months,” Jussi Hiljanen, head of fixed-income research at SEB AB in Stockholm. “The U.S. economic recovery is gathering pace while a decline in inflation in the euro area remains a concern.”

Durable Goods

A report showed orders for U.S. durable goods jumped in July by the most on record as bookings surged for commercial aircraft, while demand for business equipment eased after the biggest gain in seven months.
Bookings for goods meant to last at least three years climbed 22.6 percent after a 2.7 percent gain in June that was bigger than previously reported, data from the Commerce Department showed. A 0.5 percent drop in orders for non-military capital goods excluding aircraft last month followed a June increase of 5.4 percent.