Strong demand greets Treasury-note auction

The World Bank’s gloomy economic forecast this week may have helped Uncle Sam sell some IOUs.

The prediction of a deeper decline this year in global economic output than previously forecast sent the stock market reeling Monday and pushed down Treasury yields.

On Tuesday stocks treaded water, but a government auction of $40 billion of two-year notes drew better-than-expected demand.

The yield on the notes auctioned was 1.15%, well below the 1.2% traders had predicted in a Bloomberg News survey.

Indirect bidders, an investor class that includes foreign central banks, bought almost 69% of the notes, the biggest share in at least six years.

Still, the government had to shell out 0.21 of a percentage point of yield more than it paid on new two-year notes a month ago.

Yields on longer-term Treasuries extended their recent decline in the secondary market. The benchmark 10-year T-note fell to 3.63% from 3.69% late Monday. It was as high as 3.95% two weeks earlier after steadily rising along with stocks starting early in March.

Shorter-term notes are almost always an easy sale for the U.S. The bigger tests of investor demand will be the sales of $37 billion in five-year notes Wednesday and $27 billion in seven-year notes Thursday as the Treasury’s record borrowing binge continues.

Bond investors will be looking for Federal Reserve policymakers to end their meeting Wednesday with a statement stressing, once again, that they have no plans to raise short-term interest rates soon.

“I think they’re going to reiterate that they’re on hold for quite some time,” said Tom di Galoma, head of U.S. rates trading at Guggenheim Capital Markets in New York.

The Fed also could try to give the Treasury an assist by announcing that it will increase its purchases of government securities. But that would pose more risk to the central bank’s credibility, given that its heavy purchases of Treasuries since February haven’t kept long-term interest rates from rising.

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tom.petruno@latimes.com