Treasury Department auctions $29 billion of 2-year notes at a high yield of 0.54%

Reuters with


The Treasury Department auctioned $29 billion of 2-year notes at a high yield of 0.54 percent on Monday, the highest yield since May 2011.

The bid-to-cover ratio, an indicator of demand, was 3.22, the lowest since March. The direct bid was 14.3 percent, the smallest since last June, and the indirect bid was 27.0 percent, the biggest since March.

Yields rose on Monday and the gap between yields on five-year notes and 30-year bonds earlier slimmed to the least since 2009 ahead of a ream of data and events this week, including a Federal Reserve meeting and $93 billion of new supply. The Fed bought $1.07 billion in bonds due from 2036 to 2044 on Monday.

yields rose as high as 0.51 percent before the auction, up from 0.49 percent late on Friday.

Benchmark 10-year notes were last down 6/32 in price to yield 2.49 percent, up from 2.48 percent earlier.

Thirty-year bonds fell 10/32 in price to yield 3.26 percent, building on morning gains.

"The flight to quality trade is continuing to be in the back end of the market," said Tom Tucci, head of Treasurys trading at CIBC in New York.

Treasurys temporarily erased price losses and yields fell to session lows on Monday after contracts to buy previously owned U.S. homes unexpectedly fell in June, casting a cloud over recovery in the housing market.

Short and intermediate-dated debt has underperformed onexpectations that the Fed is likely to begin raising rates next year as theeconomy improves. New supply this week of short and intermediate-dated debtalso weighed on the front end.

In addition to Monday's auction, the Treasury will sell $35 billion in five-year notes on Tuesday and $29 billion in seven-year notes on Wednesday. It will also sell $15 billion in two-year floating rate notes on Wednesday, for a total of $93 billion sales for the week.

A major focus for the market is the Fed's meeting on July 29-30, where the U.S. central bank is expected to maintain a dovish outlook as it grapples with still slow wage growth, even as other data point to improving momentum in the economy.

The meeting will coincide with gross domestic product data for the second quarter Wednesday, which is anticipated to see if an unexpected contraction in the first quarter will be revised.

Other data this week includes housing, consumer confidence,personal income and manufacturing, along with a key employment report for July due on Friday.

Read MoreSummer's busiest week for markets is here

"Everyone is staring down the barrel of a very, very crowded data calendar," said Gennadiy Goldberg, an interest rate strategist at TDSecurities in New York.

—By Reuters. contributed to this report.