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Treasuries Gain Before Fed as 10-Year Yield Near 6-Month High Spurs Buying

Treasuries rose before tomorrow’s Federal Reserve statement on the economy as 10-year note yields near a six-month high attracted investors.

Bonds also advanced as a federal judge ruled against the U.S. health-care overhaul, easing concern that the government will struggle to contain record deficits. Less U.S. debt was submitted today for purchase by the Fed under its program of quantitative easing, giving Treasuries a boost.

“Yields are more attractive now than they were three months ago,” said John Spinello, chief technical strategist in New York at Jefferies Group Inc., one of the 18 primary dealers that trade with the Fed. “For people who haven’t been active in Treasuries, it’s a much better entry point now if they feel rates are not going to go higher.”

The yield on the 10-year note fell five basis points, or 0.05 percentage point, to 3.28 percent at 5:18 p.m. in New York, according to BGCantor Market Data. The price of the 2.625 percent security maturing in November 2020 rose 3/8, or $3.75 per $1,000 face amount, to 94 1/2.

The 10-year note yield earlier climbed seven basis points to 3.39 percent, the highest level since June 3, on speculation Congress will support economic growth by passing President Barack Obama’s plan to extend tax cuts. The yield has risen 63 basis points since Nov. 11, the day before the Fed began the $600 billion second round of debt buying.

Tax-Cut Extension

Treasuries slumped last week, pushing 10-year yields up by 31 basis points, after Obama agreed on Dec. 6 to a two-year extension of current tax rates in exchange for another 13 months of jobless benefits for the long-term unemployed and cutting the payroll tax by $120 billion for a year.

The weekly gain in the yield was the biggest since a five- day increase of 37 basis points on Aug. 7, 2009, when the U.S. payrolls report showed fewer-than-forecast job losses.

Fed policy makers meeting tomorrow may signal that they are open to boosting debt purchases beyond the amount already announced to spur job growth and avoid deflation.

Buying more government bonds is “certainly possible,” Fed Chairman Ben S. Bernanke said in an interview broadcast on CBS Corp.’s “60 Minutes” on Dec. 5, referring to the policy of quantitative easing. “It depends on the efficacy of the program” and the outlook for inflation and the economy, Bernanke said.

Primary dealers submitted today $18.268 billion of debt due from June 2016 to November 2017 for possible purchase by the central bank, compared with $33.126 billion in the same maturity range on Dec. 9. The Fed bought $7.79 billion of debt today, part of $105 billion in purchases over the next month.

‘Taken Aback’

“People were taken aback that the securities offered in the buybacks was only $18 billion,” said Charles Comiskey, head of Treasury trading at Bank of Nova Scotia in New York. “It’s just less securities being offered, meaning people’s positions have been pared down. The price action is positive.”

Treasuries rose earlier today as U.S. District Judge Henry Hudson in Richmond, Virginia, ruled that the Obama administration’s health-care overhaul is unconstitutional because it forces individuals to buy insurance.

The insurance requirement goes beyond Congress’s powers to regulate interstate commerce, Hudson ruled. He didn’t address other provisions such as expanding Medicaid that are unrelated to the insurance mandate. He held off from ordering the government to stop work on putting the law into effect.

Two-Year Yields

Two-year yields fell six basis points to 0.58 percent after increasing six basis points to 0.69 percent, the highest since June 23. The extra yield investors demand to hold 10-year notes over 2-year debt was 2.69 percentage points after touching 2.73 percentage points, the widest since April 30.

Sustaining growth may be challenging without an improvement in the unemployment rate, which climbed to a seven-month high of 9.8 percent in November.

Retail sales rose for a fifth month in November, increasing 0.6 percent, as Americans began their holiday shopping, according to the median forecast of 77 economists in a Bloomberg News survey before tomorrow’s report from the Commerce Department. Sales rose 1.2 percent in the prior month.

Consumer prices excluding food and fuel costs increased 0.6 percent in November from a year earlier, according to a Bloomberg survey before a report from the Labor Department on Dec. 15. Such an advance would match October’s increase, which was the smallest annual gain on record.

“These are some of the most important economic numbers of each month and will likely give the market a fair view of where the economic recovery stands and how much work has to be done to declare a ‘real’ turn upward,” Kevin Giddis, president of fixed-income capital markets at the brokerage firm Morgan Keegan Inc. in Memphis, Tennessee, wrote in a note to clients.

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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