Treasuries Fall for First Time in 3 Days After Reports

Treasuries fell as reports showing the U.S. economy expanded more than previously estimated and that pending home sales rose reduced speculation the Federal Reserve will announce another round of bond purchases.

Bonds declined for the first time in three days even after the U.S. sold $35 billion of five-year notes at a lower-than- forecast yield. The government will auction $29 billion in seven-year debt tomorrow. Pacific Investment Management Co.’s Bill Gross said the Fed will add to monetary stimulus whether Chairman Ben S. Bernanke indicates additional measures in an Aug. 31 speech or not.

“At the end of the day, the market is waiting for Bernanke,” Adrian Miller, a fixed-income strategist at GMP Securities LLC in New York, said in a telephone interview. “The auction came and was well received. As we move out the curve, we should see stronger demand tomorrow.”

The benchmark 10-year note yield increased two basis points, or 0.02 percentage point, to 1.65 percent at 5 p.m. in New York, according to Bloomberg Bond Trader Prices. It touched 1.61 percent yesterday, the lowest level since Aug. 8. The price of the 1.625 percent security due in August 2022 dropped 5/32, or $1.56 per $1,000 face amount, to 99 3/4.

Thirty-year yields rose two basis points to 2.77 percent, while the yield on the current five-year security was little changed at 0.68 percent after touching 0.7 percent earlier.

Volume Increases

Treasury trading volume reported by ICAP Plc, the largest inter-dealer broker of U.S. government debt, rose to $248 billion today, after dropping to $110 billion on Aug. 27, the lowest this year. It has averaged $238 billion in 2012.

The five-year notes sold today drew a yield of 0.708 percent, compared with a forecast of 0.716 percent in a Bloomberg News survey of seven of the Fed’s 21 primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.92, matching the average for the past 10 sales.

Five-year yields reached a record auction low of 0.584 percent at the last offering on July 25.

Indirect bidders, an investor class that includes foreign central banks, purchased 39.7 percent of the notes today, compared with an average of 44 percent at the past 10 offerings.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 11 percent, the highest level since the March offering. The average at the past 10 auctions was 10 percent.

Note Returns

Five-year notes have returned 1.8 percent this year, compared with a 2.2 percent gain by Treasuries overall, according to Bank of America Merrill Lynch indexes. The five- year securities rose 9.2 percent in 2011, versus a 9.8 percent advance by Treasuries overall.

Yesterday’s sale of $35 billion in two-year debt yielded 0.273 percent. Tomorrow’s auction will cap the week’s $99 billion in note sales.

Treasuries traded at the most expensive level in three weeks, according to the term premium, a model created by economists at the Fed that includes expectations for interest rates, growth and inflation. The gauge was at negative 0.88 percent today, the most costly since Aug. 6.

A negative reading indicates investors are willing to accept yields below what’s considered fair value. The average over the past decade is positive 0.46 percent.

Beige Book

Treasuries remained lower as the Fed said in its Beige Book regional business survey that the U.S. economy continued to expand “gradually” in July and early August as improvement in housing and retail sales helped outweigh weakness in manufacturing.

Pending home sales in the U.S. climbed 2.4 percent in July, more than double the forecast in a Bloomberg News survey, data from the National Association of Realtors showed. Sales dropped 1.4 percent in June.

“Housing is such a big factor in the economy that when you get sales up a little bit, it’s seen as a positive for the economy,” said Ira Jersey, an interest-rate strategist in New York at Credit Suisse Group AG, which as a primary dealer is obliged to bid at Treasury debt auctions.

The U.S. economy expanded at a 1.7 percent annualized pace in the second quarter, Commerce Department data showed today, more than the government’s initial 1.5 percent estimate a month ago. Gross domestic product grew 2 percent in the first quarter.

Fed Speculation

Treasuries gained yesterday and Aug. 27 on speculation the Fed, which meets Sept. 12-13, is planning to announce new debt purchases to spur economic growth. The central bank bought $2.3 trillion of assets in two rounds of the stimulus strategy called quantitative easing from 2008 to 2011.

Policy makers will announce more quantitative easing “relatively soon,” Gross, who runs the world’s biggest bond fund, said today in an interview on Bloomberg Television’s “Street Smart” with Trish Regan.

Bernanke may outline his views on stimulus in his speech this week in Jackson Hole, Wyoming, at the Kansas City Fed’s annual economics conference. Minutes of the Fed’s July 31-Aug. 1 meeting released last week showed many policy makers said more stimulus probably will be needed soon unless the economy shows signs of a durable pickup.

“Quantitative easing by the Federal Reserve is likely to be implemented, despite our view that the U.S. economy is stabilizing and is not likely to fall into recession,” wrote Rick Rieder, chief investment officer of fundamental fixed income at New York-based BlackRock Inc., in the firm’s August fixed-income report. “The Fed isn’t anywhere close to achieving its mandate of healthy labor markets.”

U.S. Jobs

A Labor Department report Sept. 7 is forecast to show U.S. employers added 118,000 jobs in August, down from 163,000 in July, according to economists in a Bloomberg News survey.

The Fed bought $4.75 billion of Treasuries today due from August 2018 to August 2020. The purchase is part of an effort called Operation Twist in which it is swapping shorter-term Treasuries in its holdings with those due in six to 30 years to put downward pressure on long-term interest rates.

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