Weak Two-Year Sale Sinks Treasurys

NEW YORK—Signs emerged Monday that investors are weary of historically low Treasury yields, as an auction of two-year notes was met with tepid demand.
The lack of interest in the two-year note sale dragged Treasury prices down, with buyers—excluding primary dealers—showing the least demand in any two-year sale since April 2009. The dealer community, which buys directly from the Treasury and is required to take down any leftover supply, had to eat 64.5% of the afternoon's auction, well above the 53.5% average of the last four auctions and a higher proportion than any of the past 25 sales.
Indirect bidders, which include foreign investors and central banks, scooped up 22%, below the 33.4% average from the past four auctions.
Analysts had expected the two-year note sale to be well received because there was a shortage of high-quality, short-term paper and the market was flush with cash. Instead, it flopped because investors hesitated to pay up for such little return.
"There's just so little yield available," said John Canavan, fixed-income analyst at Stone & McCarthy, adding that the lack of foreign demand has been "a disconcerting trend."
The lackluster sale solidified the first across-the-curve selloff in two weeks, putting a sizeable dent in the Treasury market's three-month bull run. Optimism about a new bailout package for Greece also helped fuel the selloff. But, if Wednesday's pivotal Greek vote to approve an austerity plan doesn't pass, the market will likely reclaim all these losses

Fed Seen Purchasing $300 Billion in Treasuries After QE2

The Federal Reserve will remain the biggest buyer of Treasuries, even after the second round of quantitative easing ends this week, as the central bank uses its $2.86 trillion balance sheet to keep interest rateslow.
While the $600 billion purchase program, known as QE2, winds down, the Fed said June 22 that it will continue to buy Treasuries with proceeds from the maturing debt it currently owns. That could mean purchases of as much as $300 billion of government debt over the next 12 months without adding money to the financial system.
The central bank, which injected $2.3 trillion into the financial system after the collapse of Lehman Brothers Holdings Inc. in September 2008, will continue buying Treasuries to keep market rates down as the economy slows. The purchases are supporting demand at bond auctions while President Barack Obama and Republicans in Congress struggle to close the gap between federal spending and income by between $2 trillion and $4 trillion.