BY REUTERS

Posted 1/24/2007

Treasury debt prices were little changed in thin trading on Wednesday after a $20 billion auction of two-year notes left benchmark yields steady near three-month highs.

The Treasury’s monthly sale of two-year notes proceeded as expected, drawing good demand, analysts said.

The Treasury sold $20 billion of the two-year securities at a high yield of 4.930%, with a 3.03 ratio of bids offered to those accepted.

“The two-year note auction drew strong interest from primary dealers, but this was more of a help to the short end (of the maturity range) than to the whole curve,” said Josh Stiles, senior bond strategist at IDEAglobal.

The two-year notes were offered at “the cheapest levels since August,” Stiles said. “So much of the hope for a Federal Reserve rate cut have been priced out that two-years have started to look like a more attractive, safer place to be.”

Two-year Treasuries are more sensitive to perceptions of Federal Reserve policy than longer-dated issues, which fluctuate with changes in inflation expectations.

Still, with the market expecting Fed policy to stay steady for the next few months, two-year yields did not wander far.

The two-year note was up 2/32 in late trade, its yield easing to 4.92% from 4.96% on Tuesday.

The new two-year note auctioned on Wednesday yielded 4.9275% in when-issued trade.

The Federal Open Market Committee, the Fed’s policy-setting group, will meet next Tuesday and Wednesday. Economists expect the FOMC will leave the key federal funds rate at 5.25%.

In afternoon trade, the benchmark 10-year Treasury note was at 98 18/32, yielding 4.81%.

In Wednesday’s only piece of major economic data, the Mortgage Bankers Association said its mortgage market index fell 8.4% to 611.3 for the week ending Jan. 19, its lowest level in four weeks. However, the index’s four-week moving average rose 2.2% from the prior week.

The latest four-week reading on mortgage application activity supports recent assessments by Fed officials that the worst of the housing correction may have be over.