U.S. 2-Year Note Yield Record Fall on Fed Move

Aug. 9 (Bloomberg) --Treasuries rose, pushing 10 and two- year note yields to a all-time lows, after Federal Reserve officials promised to keep benchmark interest rates at record lows through mid-2013 in a bid to revive economic growth.

U.S. debt rallied as central bank policy makers said economic growth is “considerably slower.” The Treasury’s sale of $32 billion in three-year notes drew stronger-than-average demand in the first note sale since Standard & Poor’s cut the U.S. debt rating Aug. 5.

“It’s pretty amazing that the Fed will be exceptionally low until 2013,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “They are telling you that we are in a stage of Japanese-like growth. The front end is rallying like crazy.”

Yields on 10-year notes fell seven basis points, or 0.07 percentage point, to 2.24 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. The 3.125 percent securities maturing in May 2021 rose 20/32, or $6.25 per $1,000 face amount, to 107 20/32. The yield touched 2.0346 percent, lower than the previous record of 2.0352 percent in December 2008.

Note and bond yields plunged after the Fed’s statement was issued at 2:18 p.m., New York time, before paring the declines later during the afternoon.

Two-year note yields fell six basis points to 0.20 percent. The yield touched 0.1568 percent, lower than the previous record of 0.2283 percent yesterday. Thirty-year bond yields fell one basis point to 3.646 percent.

The yield curve, or the difference between two- and 10-year Treasury note yields, narrowed to 2.06 percentage points, the lowest since Oct. 11, 2010.

‘Weakened Outlook’

“The market wanted the Fed to acknowledge the weakened outlook, and they did,” said Priya Misra, head of U.S. rates strategy at Bank of America Merrill Lynch in New York, one of the 20 primary dealers that trade with the Fed. “The explicit commitment to mid-2013 by the Fed has reaffirmed price action.”

Yields on 10-year notes have declined as much as 78 basis points since July 26 as economic indicators signal more slowing of the U.S. economy and President Barack Obama and Republicans in Congress engaged in a protracted struggle to address federal budget deficits and boost the debt limit, following the S&P ratings cut.

Manufacturing in the U.S. almost stalled in July, threatening to deprive the two-year recovery of one of its main drivers. The Institute for Supply Management’s factory index slumped to 50.9, the lowest since July 2009, from 55.3 a month earlier, the Tempe, Arizona-based group said Aug. 1.

The worldwide retreat from stocks and commodities has driven the value of the global bond market to a record high.

Bond Value

The market value of Bank of America Merrill Lynch’s Global Broad Market Index has increased $132.4 billion since the end of July to $42.1 trillion, the most in data going back to 1996. The index, containing more than 19,000 bonds sold by governments, banks and the world’s biggest companies, returned 1.09 percent this month as yesterday’s stock rout wiped out about $2.5 trillion in global equity values, extending total losses since July 26 to $7.8 trillion.

The Federal Open Market Committee discussed a range of policy tools to bolster the economy and said it’s “prepared to employ these tools as appropriate,” it said in a statement today in Washington.

“When you look at the economy, Europe and the uncertainty in the markets it was clear that the Fed needed to do something, and they did,” said Scott Graham, head of government bond trading at Bank of Montreal’s BMO Capital Markets unit in Chicago. “Quantitative easing may be in the cards at some point soon.”

3-Year Sale

The three-year note auction drew a yield of 0.50 percent, the lowest yield since records began in May 1981. It was less than the 0.523 percent average forecast in a Bloomberg News survey of seven of the Fed’s primary dealers.

The bid-to-cover ratio, a gauge of demand was 3.29, compared with an average of 3.15 for the past 10 sales.

Indirect bidders, an investor class that includes foreign central banks, purchased 47.9 percent of the notes, the most since May 2010, compared with an average of 33.9 percent for the past 10 sales. Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 11.1 percent of the notes at the sale, compared with an average of 13.2 percent for the past 10 auctions.

At the July sale, the securities drew a yield of 0.67 percent.

Debt Sales

The offering is the first of three note and bond auctions this week totaling $72 billion. The Treasury is scheduled to sell $24 billion in 10-year debt tomorrow and $16 billion of 30 year bonds on Aug. 11.

Treasuries surged yesterday as tumbling stock markets sparked demand for the safety of government debt. S&P cut the U.S. government’s AAA credit rating at the end of last week, while Moody’s Investors Service and Fitch Ratings have affirmed the U.S. at the top rating.

Volatility in the Treasury market has picked up. Merrill Lynch & Co.’s MOVE index, which measure price swings in Treasuries based on prices of over-the-counter options maturing in two to 30 years, rose yesterday to 117.8, the highest since Dec. 17, up from a 2011 low of 71.5 in May.

Treasuries have returned 6.2 percent this year, according to indexes complied by Bloomberg and the European Federation of Financial Analysts Societies. Japan’s government bonds have gained 1.3 percent, while German bunds have returned 4.8 percent, the indexes show.

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

To contact the editor responsible for this story: Robert Burgess at bburgess@bloomberg.net

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