Treasuries Close Slightly Higher After Solid Two-Year Note Auction

(RTTNews) - After recovering from an early move to the downside, treasuries show a lack of direction for much of the session on Monday but moved slightly higher following a solid auction of two-year notes.

Bond prices moved to the upside after the note auction but closed only just above the unchanged line. As a result, the yield on the benchmark ten-year note, which moves opposite of its price, edged down by less than a basis point at 2.31 percent.

The early weakness among treasuries partly reflected optimism about the global economic outlook following the Chinese central bank's surprise interest rate cut and European Central Bank President Mario Draghi's comments about further stimulus.

However, Peter Boockvar, managing director at the Lindsey Group, cautioned that the timing of more quantitative easing by the ECB is not completely clear.

Boockvar pointed to comments by ECB Governing Council member Ewald Nowotny noting that monetary policy has long lags and suggesting that policymakers should have a calm hand.

"Is this is way of saying Draghi doesn't have a calm hand and is panicking?" Boockvar said. "Nowotny also said headline inflation is being weighed down by energy prices and maybe they should more focus on the core rate as it's not as far away from their target."

The late-day strength among treasuries came following the Treasury Department's auction of $28 billion worth of two-year notes, which attracted strong demand.

The two-year note auction drew a high yield of 0.542 percent and a bid-to-cover ratio of 3.71, while the ten previous two-year note auctions had an average bid-to-cover ratio of 3.36.

The bid-to-cover ratio is a measure of demand that indicates the amount of bids for each dollar worth of securities being sold.

Boockvar said, "As the two-year note is highly sensitive to what the Fed does with short rates, the market certainly doesn't think a hike is coming anytime soon."

"The focus of many has been the inflation side of the dual mandate in what will drive Fed policy rather than the labor side," he added. "We still think the Fed will look at the labor market first as if it continues to tighten, wage inflation will eventually follow, and thus inflation can be looked at as a lagging indicator."

Following today's lack of major U.S. economic data, trading on Tuesday could be impacted by the Commerce Department's revised report on third quarter GDP as well as reports on home prices and consumer confidence.

Bond traders are also likely to keep an eye on the results of the Treasury's auction of $35 billion worth of five-year notes.