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Low rates no problem as investors flock to buy new Treasury debt

Uncle Sam easily found buyers Tuesday for $35 billion in new two-year Treasury notes, even with yields at their lowest levels since early December.

Strong investor demand pushed the annualized yield on the notes to 0.56%, down from 0.67% at the last two-year auction April 26.

2yr524 The market yield on the previously issued two-year note (charted at left) was at 0.51%, down from 0.52% on Monday.

With Europe’s debt mess worsening and economic data mostly on the weaker side lately, the idea of playing it safe in two-year Treasuries continues to appeal to plenty of big investors. And while 0.56% isn’t much of a yield, it beats near-zero money market yields.

The approaching end of the Federal Reserve’s $600-billion Treasury-bond-buying program clearly isn’t keeping investors away from government bonds. The Fed will finish its purchases June 30. And the market seems completely unfazed by the bitter debate in Washington over whether to raise the federal debt ceiling.

Yields on longer-term Treasuries were holding Tuesday near recent lows. The 10-year T-note yield was at 3.12%, down from 3.13% on Monday.

Given the intensity of investors’ hunger for Treasuries, any backup in yields “is likely to be met with significant buying demand,” bond analysts at Nomura Securities said in a note.

The government will auction $35 billion in five-year T-notes on Wednesday and $29 billion of seven-year notes on Thursday. Current market yields are 1.78% on outstanding five-year notes (charted at right) and 2.45% on seven-year notes.

5yr524 Pimco funds bond guru Bill Gross has for months been advising investors to avoid Treasuries, saying the yields were far too low to justify buying them. He has insisted that Treasury yields must jump once the Fed’s purchase program ends June 30.

But with yields continuing to slide since mid-April, Gross seemed to hedge his views in a Pimco tweet Tuesday.

Referring to the Fed’s program by its acronym, QE2 (for quantitative easing II, the second such program since 2008), Gross tweeted: “End of QE2 may or may not lead to higher yields, but what is clear is that a 1.79% 5 yr offers a negative real yield after inflation.”

-- Tom Petruno

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