U.S. Treasuries Are Little Changed Before Fed Releases Minutes

U.S. Treasuries were little changed on speculation the minutes of last month's Federal Reserve meeting will tomorrow show policy makers are reluctant to cut interest rates further.

Three weeks of gains have pushed two-year yields down to near the lowest since February 2005. Most investors surveyed by research company Ried, Thunberg & Co. in Jersey City, New Jersey, expect the Fed to keep borrowing costs unchanged on Dec. 11.

``Treasuries are beginning to look expensive and I think fair value is above today's yields,'' said Peter Lildholdt, a senior fixed-income analyst at Danske Bank A/S in Copenhagen. ``Our main scenario is for rates to be unchanged in December. Yields could go higher after the minutes.''

The two-year yield fell 1 basis point to 3.32 percent by 10:51 a.m. in London, according to bond broker Cantor Fitzgerald LP, after dropping to as low as 3.28 percent on Nov. 16.

The price of the 3 5/8 percent security due October 2009 rose 1/32, or 31 cents per $1,000 face amount, to 100 18/32.

Two-year notes yielded 1.18 percentage points less than the central bank's target for overnight lending, near the biggest deficit in two months.

Lildholdt said he expects two-year yields to climb to 3.5 percent by year-end.

The yield on two-year notes has fallen 60 basis points since the beginning of November. That compares with an average 16 basis-point drop in the first 19 days of June through October, according to data compiled by Bloomberg.

The yield on 10-year Treasury notes fell 2 basis points to 4.15 percent. Yields move inversely to bond prices. A basis point is 0.01 percentage point.

Interest-Rate Futures

Traders reined-in expectations the central bank will reduce its target rate next month, according to interest-rate futures.

Fed fund futures indicated a 90 percent chance the central bank will reduce its benchmark rate a quarter percentage point to 4.25 percent, down from 94 percent at the end of last week and 98 percent odds a week ago. The chances of another 25 basis-point cut in January were 67 percent, and there was a 43 percent likelihood of the rate falling to 3.75 percent in March.
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