Treasury trading volume fell to $192 billion yesterday, the lowest level since May 23 and a third straight daily decline, according to ICAP Plc, the largest inter-dealer broker of U.S. government debt. The average daily volume during the past year is $317 billion.

Two-year notes yielded 0.5 percent in when-issued trading before today's auction, which would be the highest since a sale in May 2011 yielded 0.56 percent. The yield on the current two-year note was little changed today at 0.46 percent.

Investors bid for 3.52 times the amount of notes on offer at the previous auction on May 27, compared with 3.35 in April. Indirect bidders, the category of investors that includes foreign central banks, purchased 18.9 percent, down from 23.4 percent. Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 25.2 percent.

“Two-year auction performance has weakened slightly recently,” Anshul Pradhan and Vivek Shukla, strategists at Barclays Plc in New York, wrote in an e-mailed note dated yesterday. “Both foreign investor and domestic investment fund demand has declined recently. Despite this, however, broker-dealer takedown is still higher than in 2013.”

Looming Supply

The U.S. will sell $35 billion of five-year notes tomorrow and $29 billion of seven-year securities the following day. It will auction $13 billion of two-year floating-rate debt tomorrow.

Japan's 10-year yield was unchanged at 0.58 percent, while Australia's dropped five basis points, or 0.05 percentage point, to 3.65 percent.

The Fed at its June 17-18 meeting reduced monthly debt purchases by $10 billion, to $35 billion, while leaving the target rate for overnight lending between banks in a range of zero to 0.25 percent, where it has been since December 2008.

There's a 59 percent chance the Fed will raise its benchmark rate to at least 0.5 percent by July of next year, based on Fed funds futures yesterday, compared with a 43 percent probability at the end of last month.

The 10-year break-even rate, which measures the difference between yields on benchmark notes and similar-maturity Treasury Inflation Protected Securities, widened to 2.28 percentage points yesterday, the most since Jan. 13. The gauge, which represents the bond market's forecast for the pace of consumer-price increases, has climbed from 2.21 at the end of May.

The Fed's 2 percent annual inflation goal is based on the PCE price index. The gauge increased to 1.8 percent last month, versus 1.6 percent in April, according to a Bloomberg News survey before this week's report.

Philadelphia Fed President Charles Plosser will speak today in New York on the economic outlook and the monetary policy. New York Fed President William Dudley also speaks today.

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