(Bloomberg) — Strong demand at Wednesday’s Treasury five-year note auction added to evidence that markets aren’t yet wholly convinced that the Federal Reserve is poised to tighten monetary policy this year.

A class of investors that includes foreign central banks and mutual funds bought a record amount at the $34 billion debt sale. A gauge of demand at an auction of two-year notes Tuesday climbed to the highest since May. The appetite for shorter-dated securities, which are more sensitive to Fed policy, comes after officials’ recent rhetoric that markets have been too complacent about the prospects of a rate increase this year.

Fed Chair Janet Yellen speaks Aug. 26 at an annual symposium in Jackson Hole, Wyoming. The lack of clarity on the timing of the Fed’s next move has confined Treasuries to tight trading ranges this month. Officials project the policy rate will rise this year, even as some have expressed longer-term concern that it may not climb to levels seen in previous economic cycles.

"The conditions for the Fed to hike rates again — above-trend growth, improved financial conditions, and rising inflation expectations — have not been met," John Bellows, a money manager at Pasadena, California-based Western Asset Management, which oversees $460 billion of fixed-income assets, wrote Wednesday. "Yellen is likely to avoid the question of the timing of the next hike and focus instead on the bigger picture considerations."


Treasury five-year note yields were little changed at 1.14% at 5 p.m. in New York, according to Bloomberg Bond Trader data. The price of the 1.125% security due in July 2021 was 99 29/32. The yield has been in a range this month of 18 basis points, or 0.18 percentage point, the narrowest on a closing-price basis since February 2014.

The yield on two-year securities was 0.76%, while the benchmark 10-year note yield was 1.56%.

The probability of a rate increase by September was 28%, compared with an 87% chance seen at the end of 2015, while the chance of a hike by December was about 54%, down from 93%, according to data compiled by Bloomberg from fed fund futures.

"The problem with the Fed is credibility," said Barra Sheridan, a rates trader at Bank of Montreal in London. "Too much money has been lost betting on Fed rate hikes. They’ve already broken records to not follow up on a rate hike within six months of the first one. That’s unheard of. We are already running at eight months since they tightened rates" in December.

Indirect bidders bought 68.7% of the five-year notes sold Wednesday, the most on record and compared with an average 58.4% over the previous 10 auctions. The notes drew a yield of 1.125%. The bid-to-cover ratio, a measure of demand that compares the number of bids to the amount of securities sold, was 2.54, the highest since May, after the previous sale on July 26 drew the lowest demand since 2009.

The U.S. sold $26 billion of two-year notes Tuesday at a yield of 0.76%. The bid-to-cover ratio rose to 2.83, also the highest since May.

The Treasury will sell $28 billion of seven-year notes Thursday.

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