U.S. Two-Year Treasury Yield Is Near Record Low as Investors Seek Safety

Treasury two-year yields were within three basis points of a record low before a report economists say will show U.S. jobless claims stayed near a three-month high, stoking concern that economic growth will stall.

Thirty-year bond yields were near the least in three weeks before the Treasury sells $16 billion of the securities today. The Federal Reserve prepared to buy notes starting next week, part of its plan to stimulate the economy by cutting borrowing costs. The Labor Department in Washington may say 465,000 Americans filed applications for unemployment insurance last week, down from 479,000, which was the most since April.

“The market has started to price in the risk of a double- dip recession and there’s still more downside risk for yields,” said Niels From, chief analyst at Nordea Bank AB in Copenhagen. The Fed’s decision “is keeping Treasury yields from rising. The macroeconomic data has been soft.”

The two-year note yielded 0.51 percent as of 7 a.m. in New York, after falling to a record 0.4892 percent yesterday. The 0.625 percent security due in July 2012 traded at 100 7/32, according to BGCantor Market Data. The 10-year yield was little changed at 2.73 percent.

A lack of jobs will curtail consumer spending and restrain the U.S. recovery more than previously estimated, according to economists surveyed by Bloomberg News.

Slower Growth

Gross domestic product will expand at an average 2.55 percent annual rate in the last six months of 2010, according to the median of 67 estimates in a survey taken July 31 to Aug. 9, down from the 2.8 percent pace projected last month. Household purchases will climb at a 2.25 percent rate, compared with a 2.6 percent gain previously forecast.

“We should expect further downward revisions in analysts’ growth, revenue and earnings projections,” Mohamed A. El-Erian, chief executive officer at Pacific Investment Management Co., wrote today on the Financial Times website. Pimco, based in Newport Beach, California, manages the world’s biggest bond fund.

The 30-year bonds being sold today yielded 3.92 percent in pre-auction trading, compared with 4.08 percent at the previous offering on July 14.

Yields Unattractive

Investors bid for 2.89 times the amount of debt on offer, versus an average of 2.61 for the past 10 sales. Indirect bidders, the investor group that includes foreign central banks, bought 37.4 percent of the securities, versus the 10-auction average of 35.5 percent.

The Treasury also auctioned $34 billion of three-year notes and $24 billion of 10-year debt this week.

Yields are unattractive to Kazuhito Miyabe, who helps oversee $12 billion as head of foreign fixed income in Tokyo at Toyota Asset Management Co., a unit of the world’s largest automaker.

“The rate is too low,” Miyabe said. He is favoring five- year Australian bonds with rates of 4.64 percent, versus 1.43 percent for the same maturity in the U.S.

A Bloomberg survey of banks and securities companies projects benchmark 10-year rates will climb to 3.21 percent from 2.73 percent today. The most recent forecasts were given the heaviest weightings.

Fed Reinvestment

The Fed announced Aug. 10 that it will reinvest principal payments on its mortgage holdings into Treasury securities. It retained a commitment to keep its benchmark interest rate close to zero for an “extended period.”

The first purchases will be on Aug. 17 for Treasuries due from August 2014 to July 2016, and on Aug. 19 for securities maturing from August 2016 to August 2020, according to the Fed Bank of New York website.

Treasury yields are benchmarks for company and mortgage borrowing costs. The central bank bought $300 billion of the securities last year “to help improve conditions in private credit markets,” according to a statement on March 18, 2009.

The average rate on a 30-year fixed mortgage fell to 4.49 percent in the first week of August, the lowest level since Freddie Mac started keeping weekly data in 1972.

The Fed said it will concentrate its purchases on two- to 10-year maturities.

The difference between two- and 10-year yields narrowed to as little as 2.16 percentage points, the least since April 2009.

The extra yield that investors demand for 30-year bonds compared with 10-year debt was 1.22 percentage points, after widening to 1.28 percentage yesterday, the most since the Treasury began regularly scheduled sales of the longer-dated securities in 1977.

To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net.

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