June 27 (Bloomberg) -- Treasuries rose, with 10-year note yields falling the most since March, after the Federal Reserve said it would keep rates near zero through the rest of the year and reports showed a jump in jobless claims and tame inflation.

U.S. debt gained for a third week as the Treasury’s auctions for a record $104 billion in notes drew higher-than- forecast demand and an increased amount of bids from an investor class that includes foreign central banks. The central bank bought Treasuries in two purchase operations, part of its program to cap borrowing costs, and left unchanged the size of its asset-purchase program at a policy-making meeting.

“The lower yields are a comfort level in terms of where the Fed is, what they are going to do, and how long they are going to do it for,” David Robin, an interest-rate strategist in New York at Newedge USA LLC, an institutional brokerage firm, said yesterday. “It will use all tools necessary to stimulate growth.”

Ten-year yields fell 25 basis points this week, the biggest weekly drop since the five days through March 20, when the rate decreated 26 basis points. The price of the 3.125 percent security due in May 2019 rose 2 1/32, or $20.31 per $1,000 face amount, to 96 19/32.

Government securities gained after the Commerce Department said yesterday a price gauge tied to consumer spending patterns rose 0.1 percent from May 2008, the smallest increase since records began in 1959. The savings rate surged to 6.9 percent, the highest level since December 1993.

Quantitative Easing

“There is no core inflationary pressure and spending is subdued,” Kevin Flanagan, a Purchase, New York-based fixed- income strategist for Morgan Stanley Smith Barney, said yesterday. “The data shows that this whole recovery theme that things would take off is not there. The numbers are not supporting it quite yet.”

The Federal Open Market Committee voted on June 24 to hold its benchmark interest rate in a range of zero to 0.25 percent and maintain the size of its $1.75 trillion program to buy mortgage debt and Treasuries, a policy known as quantitative easing. The statement indicated policy makers need more time to assess the prospects for a recovery starting in the second half of the year before deciding to embark on any exit from their unprecedented credit programs.

“The Fed did not increase quantitative easing,” Brian Edmonds, head of interest rates at Cantor Fitzgerald LP in New York, one of 16 primary dealers that trade with the central bank, said yesterday. “People think the government won’t monetize the debt. Maybe they heard from the Fed what they wanted to hear. I’m still cautious. I’m wary as we get to 3.5 percent.”

Treasury Purchases

Fed funds futures contracts on the Chicago Board of Trade yesterday showed a 37 percent probability the central bank would lift its target rate by December. The odds had climbed to as high as 75 percent at the start of the month.

The central bank bought U.S. debt in two operations this week, bringing to $180.724 billion the amount acquired since the purchases began on March 25. Four more so-called coupon passes are scheduled over the next two weeks.

Rising yields are complicating Fed Chairman Ben S. Bernanke’s effort to cap consumer borrowing costs. Ten-year yields have risen around 107 basis points since the Fed announced its $300 billion, six-month Treasury purchase program on March 18. Thirty-year fixed-rate mortgages jumped to 5.51 percent on June 25 from as low as 4.85 percent in April, according to Bankrate.com in North Palm Beach, Florida.

Initial jobless claims rose by 15,000 to 627,000 in the week ended June 20, the Labor Department reported on June 25. Economists had forecast jobless claims would fall to 600,000, according to the median of 41 estimates in a Bloomberg News survey, from a previously reported 608,000 a week earlier.

‘Psychological Thing’

“The fact is that we’re not getting below that 600,000 mark on jobless claims,” said Michael Franzese, head of government bond trading for Standard Chartered in New York. “That means July 2’s jobless number might persist to a 10 percent rate and it’s a psychological thing.”

The jobless rate climbed to 9.6 percent in June, the highest in 26 years, according to the median of 58 economists surveyed by Bloomberg before the July 2 Labor Department report.

The difference between rates on 10-year notes and Treasury Inflation Protected Securities, which reflects the outlook among traders for consumer prices, narrowed to 1.70 percentage points yesterday, from 2.02 percentage points two weeks ago.

‘Changing the Rules’

The Treasury’s auctions of two-, five- and seven year notes drew higher demand from indirect bidders, a class of investors that includes foreign central banks, than in the previous auctions of those maturities in May.

Indirect bidders bought 67.2 percent of the seven-year offering, compared to 33 percent at the previous sale; 62.8 percent of the five-year notes, after purchasing 44.2 percent at the prior auction; and 68.7 percent of the two-year notes, versus 54.4 percent at the sale in May.

The levels of indirect bidders may have been affected by a rule change that eliminated a provision allowing some customer awards to be classified as dealer bids.

“By changing the rules, it forced central banks to come through the indirect area,” Andrew Brenner, co-head of structured products and emerging markets in New York at MF Global Inc., the world’s largest broker of exchange-traded futures, said yesterday. “It clearly shows how much demand central banks have for U.S. Treasuries. Treasuries still offer the best liquidity and respectable rates relative to other rates in the world.”

Marketable Debt

U.S. government securities are poised for their worst quarter since the first three months of 1980. The securities have lost 3 percent since March 31, according to Merrill Lynch & Co.’s U.S. Treasury Master Index. They’ve fallen 4.4 percent this year as President Barack Obama sells record amounts to stimulate the economy and service record deficits. The securities haven’t posted an annual decline since 1999.

The Treasury will resume debt sales with an auction of 10- year Treasury Inflation Protected Securities on July 6. It will sell 3-, 10- and 30-year securities on three consecutive days beginning July 7.

The U.S. will sell $3.25 trillion of debt in the fiscal year ending Sept. 30, according to primary dealer Goldman Sachs Group Inc. Obama has pushed the nation’s marketable debt to an unprecedented $6.45 trillion. The budget deficit is projected to increase to $1.85 trillion in the year ending Sept. 30, equivalent to 13 percent of the nation’s economy, according to the Congressional Budget Office.

To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net.

Last Updated: June 27, 2009 08:00 EDT