Federal Reserve's rates meeting, government's auction of 5-year notes on tap By Deborah Levine, MarketWatch NEW YORK (MarketWatch) -- Treasury prices rose on Wednesday, pushing long-term yields to the lowest levels in a month, after a U.S. report showed sales of newly built homes plunged to a record low in May, adding to worries that a moribund housing market will weigh down economic growth. The main events of the day, still to come, are the government's auction of 5-year notes and the end of the Federal Reserve's policy meeting. Yields on 2-year debt (UST2YR 0.69, +0.01, +1.02%) , which are more closely tied to interest-rate expectations, fell 2 basis points to 0.68%, just a few basis points above the lowest level on record. They closed Tuesday at the lowest since December. Bond yields move inversely to prices. A basis point is 0.01%. Yields on 10-year notes (UST10Y 3.12, -0.05, -1.55%) dropped 5 basis points 3.12%. They earlier fell to the lowest on an intraday basis since late May. Rekindling worries about economic growth, the Commerce Department reported that sales of new homes dropped 33% last month to a record-low pace of 300,000. Read about new home sales. "There is not a lot to say about this report beyond it's far weaker than expected," said strategists at CRT Capital Group. The meeting of the Federal Open Market Committee ends at 2:15 Eastern time, when it will release a statement with its economic and policy outlook. The FOMC decision "should lean dovish as the Fed will highlight the problems with euro and European sovereign risk as a real drag on potential growth in the U.S.," said Tom di Galoma, head of U.S. rates trading at Guggenheim Partners. Officials might also mention last month's weaker-than-expected U.S. jobs data as well as the ongoing oil spill in the Gulf of Mexico as factors contributing to what's already a gloomy outlook, he said. Central bank officials are likely to reiterate that interest rates will remain low for an extended period and that some economic data have softened, said John Spinello, a strategist at Jefferies & Co. "Any concern for a double-dip scenario is the unlikely outcome," Spinello said. The biggest bond dealers forecast no change in the federal funds rate this year, and they expect the Fed to first use its other tools -- including reverse repurchase operations and term deposit auctions -- to normalize monetary policy, according to a MarketWatch survey. Read about Fed, bond yield forecasts. Still, bond yields will rise into the end of the year as global economic growth becomes steadier, they said. Auction preview Also Wednesday, the Treasury Department will auction $38 billion in 5-year notes (UST5YR 1.93, -0.04, -1.94%) , accepting bids until 1 p.m. Eastern. See results of recent auctions. The amount is the smallest since last June, as the government has recently been able to reduce auction sizes as its budget needs become clearer. At the last four sales of 5-year notes, all for larger amounts, bidders offered to buy an average of 2.69 times the amount of debt sold. Indirect bidders, a group that includes foreign central banks, bought 42.4% of recent sales. Direct bidders, which includes domestic money managers, purchased another 13.2%, on average. A higher proportion of the auction going to indirect and direct bidders is a good sign for investors and the government, because they are more likely to hold onto the debt longer. By contrast, primary dealers often have to turn around and sell newly-bought debt just after the auction, pressure prices down. The sale will follow Tuesday's 2-year auction, which received very strong demand even though it came at the lowest yield on record for an auction -- and so the lowest cost to the government. Read about 2-year auction. That success came without much of a selloff ahead of the auction, pressure that dealers try to exert in an attempt to get a better price at the sale. "Granted, 2-year auctions are almost always well-received by the market and maybe we shouldn't read that much into it," said George Goncalves, a bond strategist at Nomura Securities. "Such a strong auction, coming without any noticeable concession, can only bode well for upcoming 5-year and 7-year supply." The government will end the week's sales with $30 billion in 7-year notes (UST7YR 2.58, -0.05, -1.90%) to be auctioned on Thursday.

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