Treasuries Gain as Fed Seen Announcing More Debt Buying

Treasuries rose, snapping a two-day decline, as economists said the Federal Reserve will announce today a third round of bond purchases known as quantitative easing to spur economic growth.

Benchmark 10-year yields dropped from almost the highest level in three weeks before the Federal Open Market Committee also releases policy makers’ forecasts for unemployment, inflation and the expected path of the federal-funds interest rate over the next several years. Thirty-year bonds advanced before the Treasury sells $13 billion of the securities today. Initial jobless claims rose more than forecast, data showed.

“Front and center is the FOMC,” said Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc., one of 21 primary dealers that trade with the Fed. “The market is expecting something, and it runs the gamut from longer guidance to a QE3 program. I would view this as one of the most important FOMC announcements in the last two years.”

The 10-year yield fell four basis points, or 0.04 percentage point, to 1.72 percent at 10:18 a.m. New York time, according to Bloomberg Bond Trader prices. The price of the 1.625 percent note due in August 2022 rose 10/32, or $3.13 per $1,000 face amount, to 99 3/32. The yield climbed to 1.77 percent yesterday, the highest since Aug. 22.

The 30-year bond yield decreased three basis points to 2.89 percent.

The U.S. central bank will announce additional bond purchases, according to almost two-thirds of economists in a Bloomberg survey, while also extending into 2015 its pledge to keep interest rates at virtually zero.

Fed Statement

The Federal Open Market Committee plans to release a statement at about 12:30 p.m. in Washington after a two-day meeting. At 2 p.m. the Fed will release policy makers’ forecasts. Chairman Ben S. Bernanke plans to hold a press conference at about 2:15 p.m.

Global economic growth is poised to decelerate to 2.27 percent this year from 2.87 percent in 2011, based on a Bloomberg News survey.

Initial claims for jobless benefits in the U.S. rose to 382,000 in the week ended Sept. 8, from a revised 367,000 the previous week, the Labor Department reported. The median forecast of 50 economists in a Bloomberg News survey was for a rise to 370,000.

The 30-year bonds scheduled for sale today yielded 2.90 percent in pre-auction trading, compared with 2.825 percent at the previous sale on Aug. 9. Investors bid for 2.41 times the amount of debt offered last month, versus 2.70 in July.

The U.S. auctioned $21 billion of 10-year notes yesterday and $32 billion of three-year debt the day before.

TIPS Sale

The government is also scheduled to announce today the size of a 10-year sale of Treasury Inflation Protected Securities scheduled for Sept. 20. The auction will be for $13 billion, according to Wrightson ICAP LLC, an economic advisory company in Jersey City, New Jersey, that specializes in government finance.

Treasuries fell yesterday as some investors bet Fed efforts to spur the economy will increase demand for stocks.

Investors in U.S. government securities earned 1.7 percent in 2012 as of yesterday, compared with a 2.1 percent gain from German bonds, according to Bank of America Merrill Lynch indexes. The Standard & Poor’s 500 Index of shares returned 16 percent, including reinvested dividends, according to data compiled by Bloomberg.

Pimco Holdings

Bill Gross, who runs the world’s biggest bond fund, reduced holdings of U.S. Treasuries to the lowest since October while saying that more central bank stimulus will lead to a resurgence of inflation.

Gross cut the proportion of U.S. government and Treasury debt in Pacific Investment Management Co.’s $272 billion Total Return Fund to 21 percent of assets in August, from 33 percent the previous month, according to a report on the Newport Beach, California-based company’s website yesterday. Mortgage assets dropped to 50 percent from 51 percent.

Fed asset purchases aim to “reflate” the economy, Gross wrote on Twitter yesterday.

Ten-year notes have been the best-performing Treasuries this year, returning 3.1 percent, the Bank of America indexes show. Thirty-year bonds, those most vulnerable to inflation because of their long maturity, advanced 1.6 percent.

Producer Prices

Wholesale prices in the U.S. increased last month by the most in more than three years, reflecting a surge in energy costs. Producer prices rose 1.7 percent, after advancing 0.3 percent in July, the Labor Department reported. A Bloomberg survey before the Labor Department report forecast the figure would increase 1.2 percent.

Excluding food and energy, the index rose 0.2 percent last month, in line with forecasts. Consumer prices gained 0.6 percent, a separate survey showed before the department issues the data tomorrow. The number would be the most since 2009.

The difference between yields on 10-year notes and same- maturity TIPS, a gauge of trader expectations for consumer prices over the life of the debt, widened to 2.41 percentage points yesterday, the most since March. The spread was 2.39 percentage points today, versus a 2012 average of 2.20.

The extra yield investors demand to buy mortgage bonds instead of government securities narrowed to the least in five years this week on speculation the Fed will buy a mix of Treasury notes and mortgage-backed securities.

A Bloomberg index of yields on Fannie Mae-guaranteed mortgage bonds shows the spread narrowed to 1.13 percentage points on Sept. 10, the least since April 2007. The gap was 1.14 percentage points today.

Bond-market yields have “largely priced-in” expectations for Fed debt purchases, Bank of America said yesterday.

If the Fed holds off this month, it will probably issue a statement indicating that easing is likely in the future, according to a report by Michael Hanson, senior U.S. economist, and Priya Misra, head of U.S. rates strategy, in New York.

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Anchalee Worrachate in London at aworrachate@bloomberg.net;

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

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