Two-year Treasury Yields Hits Low Of 2009

• Key Interest Rates
• Bond Market Update

By Deborah Levine, MarketWatch

Last Update: 12:35 PM ET Nov 20, 2009

NEW YORK (MarketWatch) -- Short-term Treasury prices rallied again on Friday, sending yields on 2-year notes to the lowest levels this year, as investors stepped away from riskier assets to lock in profits with an eye already turned toward the end of 2009.

The bond market is also reflecting increasing concerns that the U.S. economy won't rebound from the recession as quickly or strongly as markets had accounted for -- especially after Federal Reserve Chairman Ben Bernanke said earlier this week that extremely low interest rates would be merited for some time.

Meanwhile, yields on longer-dated maturities turned up slightly as corporate-bond pricings weighed on the government sector, traders said. Yields move inversely to bond prices.

Yields on 2-year notes (UST2YR) slid 1 basis point to 0.70%, after having fallen as low as 0.67%. A basis point is 0.01%.

Yields on 3-month bills (UST3MO) , one of the most popular very short-term securities, also declined 1 basis point to yield a single basis point. The yield on bills maturing in January briefly turned negative on Thursday, according to Dow Jones Newswires, a first since the height of the credit crisis.

Yields on 10-year notes (UST10Y) , less of a refuge when investors desire safety, added 1 basis point to 3.35%, recovering after they touched the lowest in a month.

"We are amazed that 2-year notes are at their low yields of the year, and close to their low yields of the entire cycle," said strategists at CRT Capital Group. "That speaks to a lot of issues -- the Fed, ongoing weakness, inflation fears, dollar angst. But those issues are cover at the moment for the broader need for liquidity and a place to park cash for the year end."

For the week, 2-year yields have fallen for a fourth consecutive week, while 10-year yields have declined for a second week.

So far this year, 2-year notes have returned 1.65%, according to an index compiled by Merrill Lynch. Ten-year notes have lost 6.35% for 2009 to date, according to another Merrill index.

Debt deluge

The economic calendar on Friday is bare, though traders braced for some choppiness due both to options expirations during the session and to preparations for next week's $118 billion in Treasury auctions.

The Treasury Department says it will sell $44 billion in 2-year notes on Monday, matching the record amount of the securities sold last month. That sale will be followed by $42 billion in 5-year notes (UST5YR) on Tuesday and $32 billion in 7-year notes the day after that -- all crammed in before the Thanksgiving holiday. The latter two sales set new records for the most ever sold and are $1 billion more than October's sales.

"The auctions next week will help set the tone for the Treasury market over the rest of the year, but recent indications are that the supply will be well received," said bond strategists at RBS Securities, one of the 18 primary security dealers required to bid at government auctions.

The 2-year sale is "likely to go down without any problems despite the fact that yields are now nearly 35 basis points lower than the October auction," they forecast.

Among the major corporate-debt sales during the session, CDP Financial was selling $5 billion in AAA-rated bonds, creating hedging activity that weighed on the market, said Andrew Brenner, head of emerging markets at Guggenheim Securities.

TD Ameritrade (AMTD) is also issuing $2 billion, possibly pricing on Friday, according to Informa Global Markets.

Companies including Boeing Co. (BA) , Harley-Davidson (HOG) , Fortune Brands (FO) and Kellogg Co. (K) have sold debt this week, contributing to $72.8 billion in debt already sold in November, Informa said.