Treasuries Hold Gain Before $21 Billion 10-Year Sale

Treasuries held a gain from yesterday as investors prepared to bid for $21 billion in 10- year notes after a three-year sale drew record demand.

A decline in stocks around the world helped buoy bonds, and Federal Reserve Vice Chairman Janet Yellen said U.S. securities are regarded as a haven. The Fed is scheduled to issue its Beige Book business survey today, after Chairman Ben S. Bernanke said last week the central bank’s debt-buying program is needed to spur employment.

“Money should be coming into safe-haven assets, and that is U.S. Treasuries,” said Tomohisa Fujiki, an interest-rate strategist in Tokyo at BNP Paribas SA, whose New York unit is one of the 21 primary dealers obliged to bid at U.S. debt sales. “Equities are not doing well.”

Benchmark 10-year notes yielded 1.72 percent as of 7:16 a.m. in London, based on Bloomberg Bond Trader data. The record low was 1.38 percent on July 25. The price of the 1.625 percent security due in August 2022 was 99 5/32 today. Ten-year rates have fallen from 1.74 percent at the end of last week.

The MSCI All-Country World Index of shares slid 0.2 percent. It dropped 1.5 percent over the previous two days, the steepest back-to-back decline in almost two weeks.

Japan’s 10-year yield was little changed at 0.765 percent, versus this year’s low of 0.72 percent.

Weak Economy

Yellen, speaking today at an International Monetary Fund meeting in Tokyo, also said “low inflation” and “weakness in the U.S. economy” have pushed yields down.

The Fed announced Sept. 13 it will keep the main interest rate at almost zero until at least mid-2015 and buy $40 billion of mortgage debt every month in a third round of so-called quantitative easing. The central bank is also swapping shorter- term Treasuries in its holdings for longer maturities. It plans to sell as much as $8 billion of debt due from April 2014 to February 2015 today as part of the plan, according to the Fed Bank of New York website.

U.S. consumer prices rose 1.7 percent in August from the year before, according to the latest figures from the Labor Department. The rate has slowed from 3.8 percent in August 2011.

The difference between yields on 10-year notes and same- maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, was 2.55 percent.

The IMF said European banks may need to sell as much as $4.5 trillion in assets through 2013 if policy makers fall short of pledges to stem the fiscal crisis, up 18 percent from its April estimate.

Economic Improvement

There are signs of improvement in the U.S. economy, as President Barack Obama and challenger Mitt Romney prepare to face off in a Nov. 6 election.

U.S. unemployment declined to 7.8 percent in September from 8.1 percent the month before, the Labor Department reported Oct. 5. Existing-home sales and retail sales were both stronger in August than analysts projected, industry and government reports showed last month.

The $32 billion three-year sale yesterday drew a bid-to- cover ratio, which gauges demand by comparing total bids with the amount of securities offered, of 3.96. The figure topped the previous high last month of 3.94.

Investors at the last auction of 2022 debt on Sept. 12 bid for 2.85 times the amount of debt available, versus the average of 3.11 for the past 10 auctions of the maturity.

Record Demand

The U.S. has attracted a record $3.16 in bids for each dollar of the $1.59 trillion of securities it has sold in 2012 as of last week, according to data compiled by Bloomberg. That exceeds the previous high of $3.04 set last year.

The government is scheduled to conclude this week’s sales with $13 billion of 30-year bonds tomorrow. With the so-called long-bond yield little changed at 2.93 percent today, Tomoya Masanao at Pacific Investment Management Co. said investors should avoid the securities when rates are less than 3 percent.

Investors should favor intermediate maturities, Masanao said at a conference in Tokyo today. Pimco, based in Newport Beach, California, has $1.82 trillion under management including the world’s biggest bond fund.

Treasury 10-year notes have returned 3.7 percent this year through yesterday, according to Bank of America Merrill Lynch indexes. Three-year debt advanced 0.5 percent, while 30-year bonds gained 1.6 percent, the data show.

While stocks fell this week, the MSCI All-Country World Index (MXWD) has rallied 14 percent in 2012, according to data compiled by Bloomberg.

High Yield

High-yield bonds are attractive, according to Columbia Management Investment Advisers LLC, which is based in Boston and manages $331 billion.

Returns may be in the “mid single digit range” over the next 12 months, Jennifer Ponce De Leon, a portfolio manager, wrote on the company’s website Oct. 8.

High-yield bonds are rated below Baa3 by Moody’s Investors Service and less than BBB- at Standard & Poor’s.

Schroders Plc (SDR), which is based in London and oversees $305.1 billion, said corporate bonds and emerging market debt should prosper.

Fed efforts to put downward pressure on borrowing costs will intensify the search for yield, Keith Wade, the chief economist, wrote on the company’s website Oct 8.

To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.

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