Treasuries Gain as Stocks Fall; 10-Year Yield Range Rises From 2-Month Low

Treasuries rose, with 10-year note yields breaking out of the narrowest range in two months, as U.S. stocks fell after a report showed housing starts declined more than forecast in December.

The extra yield 30-year bonds offer over two-year notes was near a record, indicating investors are demanding compensation for the risk that inflation will accelerate. The Federal Reserve purchased $7.7 billion in Treasuries. Volume in the U.S. debt market was the lowest in more than a week.

“Given the backup in rates yesterday, lower stock prices and no news coming out of Europe, you get an environment where the buyers step in,” said Kevin Flanagan, Purchase, New York- based chief fixed-income strategist for Morgan Stanley Smith Barney.

The benchmark 10-year note yield decreased three basis points, or 0.03 percentage point, to 3.34 percent at 5 p.m. in New York, according to BGCantor Market Data. It slid earlier to 3.32 percent and rose to 3.39 percent. It reached 3.41 percent yesterday, the highest level since Jan. 12. The 2.625 percent security due in November 2020 rose 7/32, or $2.19 per $1,000 face amount, to 94 2/32.

Ten-year yields earlier traded in a 4.7 basis-point range between 3.39 percent and 3.34 percent, the narrowest gap since Nov. 11.

“People are looking at the wider range of 3.25 to 3.55 and within that, the 3.30 to 3.40 subset,” said Morgan Stanley Smith Barney’s Flanagan. “Without any further news, the 3.40 on the 10-year tends to bring in some buyers.”

30-Year Yields

Yields on 30-year bonds dropped four basis points to 4.53 percent. They touched 4.61 percent yesterday, the highest level in a month. Two-year note yields decreased two basis points to 0.56 percent.

“We are still stuck in a range,” said Paul Horrmann, a broker in New York at Tradition Asiel Securities Inc., an interdealer broker. “The breakouts have been very small and nimble, and we’ve retraced back into the range.”

About $262 billion of Treasuries traded as of 4:01 p.m., the least since Jan. 10, according to Icap Plc, the world’s largest interdealer broker. About $273 billion changed hands yesterday. The full-day average for 2010 was $249.4 billion.

Housing starts fell 4.3 percent to a 529,000 annual rate, the lowest level since October 2009, Commerce Department figures showed today in Washington. The median forecast in a Bloomberg News survey called for a 550,000 rate.

The Standard & Poor’s 500 Index dropped 1 percent after closing yesterday at a 2 1/2-year high.

Fed Purchases

The Fed acquired Treasuries today due from December 2013 to January 2014. It bought 19.8 percent of the $39.1 billion offered by holders, compared with an average of 34 percent at the past 10 purchases.

The central bank is also scheduled to buy Treasuries tomorrow and Jan. 21, according to its website. It announced in November it planned to acquire $600 billion of U.S. debt by the middle of this year to boost employment and avert deflation.

The spread between 2- and 30-year yields was 3.97 percentage points, after widening yesterday to 4.01 percentage points. That was the steepest slope to the so-called yield curve since Bloomberg records on the data began in 1977.

“It reflects the market’s concern for inflation even though inflation is not really getting out of control at this point,” said Alex Li, an interest-rate strategist in New York at primary dealer Deutsche Bank AG.

Inflation Bets

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, or TIPS, a gauge of trader expectations for consumer prices over the life of the securities, was 2.36 percentage points. The five-year average is 2.09 percentage points, and the spread reached a 2010 low of 1.47 percentage points in August.

The U.S. may sell next week $35 billion in 2-year notes, an equal amount in 5-year debt and $29 billion in 7-year securities, according to the average forecast of nine primary dealers in a Bloomberg survey. The sizes are unchanged from the last three auctions of the maturities.

The Treasury will announce the sizes of the sales tomorrow. The auctions will take place on three consecutive days beginning Jan. 25. The department will also sell $13 billion tomorrow in 10-year TIPS.

U.S. government securities are down in January amid speculation Fed bond purchases combined with tax cuts approved by President Barack Obama last year will work to spur the economy. Treasuries have lost 0.1 percent this month, following a 2.7 percent decline in the fourth quarter of 2010, according to Bank of America Merrill Lynch indexes.

Finance ministers of nations using the euro, meeting on Jan. 17, ruled out increasing the size of the 750 billion-euro ($1 trillion) European Financial Stability Facility for now. The EFSF is a rescue fund created after the region’s sovereign-debt crisis erupted.

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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