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Lacklustre demand at a $26bn auction of two-year US government notes signaled a waning of interest in shorter-dated Treasuries as investors warm to the view that the Federal Reserve may lift rates later this year.

The auction of notes maturing in 2018 drew $67bn of demand, equating to a bid-to-cover ratio of 2.52 — the lowest level since December 2008, US capital markets correspondent Eric Platt reports. The notes sold with a yield of 0.76 per cent.

Investors have started to slowly coalesce around the view that the US central bank may lift interest rates by its December monetary policy meeting after a string of better than expected economic reports. While the market continues to price in the next rise in the first quarter of 2017, odds for a December increase have climbed to 48 per cent from 12 per cent at the start of the month.

Two year Treasuries are among the most sensitive to changes in monetary policy and on-the-run notes weakened after the auction, sending the yield on the notes 3 basis points higher to 0.735 per cent. Yields rise when bond prices fall.

Ian Lyngen, a fixed income strategist, characterised the debt sale as “weak” and noted that indirect bidders — a group that includes foreign central banks and institutional investors — were awarded all of the bonds they bid for. He said that suggested a “softening of broader demand” for the asset class.

“…does this terrible auction imply the sentiment is getting a bit more guarded in that maybe the Fed is in play again this year with a setup on Wednesday? I certainly don’t know for sure but it certainly seems that way if the market could speak to us after this auction,” added Peter Boockvar, chief market analyst at The Lindsey Group.

Copyright The Financial Times Limited 2017. All rights reserved.

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