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U.S. 7-Year Notes Fall Before Auction; Fitch Unchanged

Treasury seven-year notes fell, pushing its yield to a two-month high, before the U.S. sells $29 billion in seven-year notes.

U.S. debt pared losses after Fitch Ratings reiterated its negative outlook on the U.S.’s AAA credit ranking is unlikely to change before late 2013, as it waits to assess any deficit- reduction plans after the Nov. 6 elections. Treasuries fell for a second day after the Federal Open Market Committee ended a policy meeting yesterday without saying whether it will continue with Treasury purchases after the expiration of its so-called Operation Twist in December.

“The bullish backdrop is still in place, as there are still a lot of headwinds to the global economy, you still have the fiscal cliff and you still have Europe and the election even as the Fed continues to buy Treasuries,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors.

The current U.S. seven-year yield rose three basis points, or 0.03 percentage point, to 1.24 percent at 11:46 a.m. New York time, after reaching 1.28 percent, the highest since Aug. 21, according to Bloomberg Bond Trader prices. The 1 percent note maturing in September 2019 declined 5/32, or $1.56 per $1,000 face amount, to 98 14/32. Ten-year note yields added one basis point to 1.80 percent after rising as much as seven basis points.

Price Swings

Volatility dropped to 67 basis points yesterday, below this year’s average of 72.4 basis points, according to the latest data available from Bank of America Merrill Lynch’s MOVE index, which measures price swings based on options. It touched 57.5 basis points on Sept. 19, the least since May 7. The average during the past decade is 99.6 basis points.

U.S. government securities due in 10 years and longer have handed investors a 6.3 percent loss in the past three months, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

The seven-year notes to be sold today yielded 1.25 percent in pre-auction trading. The offering will be the last of three note sales this week. The U.S. auctioned $35 billion of two-year debt on Oct. 23 and the same amount of five-year securities yesterday.

The Sept. 27 seven-year offering’s bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 2.61. The average for the past 10 auctions is 2.76.

Auction Data

Indirect bidders, a class of investors that includes foreign central banks, bought 34.9 percent of the notes at the September sale after purchasing 38.4 percent in August. The average for the past 10 offerings is 40.1 percent.

Direct bidders, non-primary dealer investors that place their bids directly with the Treasury, purchased 17 percent of the notes at the last sale, versus an average of 13.9 percent at the past 10.

The seven-year auction “may thus be in a no-man’s land as investors tighten up the ship before year-end,” William O’Donnell, head U.S. government bond strategist at RBS Securities Inc. in Stamford, Connecticut, one of 21 primary dealers that trade with the Fed wrote in a note to clients.

The security cheapening against five- and seven-year notes may pave the way for a strong auction, he added.

Bookings for non-defense capital goods excluding aircraft, considered a proxy for future business spending, were little changed after rising 0.2 percent in August, less than previously estimated, a Commerce Department report showed today in Washington. Demand for all durable goods climbed 9.9 percent last month, exceeding the median forecast of economists surveyed by Bloomberg and reflecting a rebound in airplane orders.

Economic Reading

“Those were a weak set of numbers,” said David Ader, head of U.S. government bond strategy at CRT in Stamford, Connecticut. “It is contributing more to a depressed willingness to buy strength than a desire to sell weakness.”

Fewer Americans filed first-time applications for unemployment benefits last week as the seasonal volatility at the start of the quarter wound down.

Jobless claims decreased by 23,000 to 369,000 in the week ended Oct. 20 from a revised 392,000 the prior period, the Labor Department reported today in Washington. The median forecast of 48 economists surveyed by Bloomberg called for a drop in claims to 370,000.

U.S. gross domestic product rose at a 1.9 percent annual rate in the third quarter after expanding at a 1.3 percent pace the prior three months, the median economist estimate showed before data from the Commerce Department tomorrow. That would be the first back-to-back readings lower than 2 percent since the U.S. was emerging from the recession in 2009.

Fed View

The Fed said the economy is still growing modestly and unemployment remains elevated as it maintained $40 billion in monthly purchases of mortgage-backed securities aimed at spurring the three-year expansion.

The central bank is swapping short-term Treasuries in its holdings for longer-term securities to cap yields as part of its efforts. The central bank bought $4.74 billion of notes due from November 2020 to August 2022 today, according to the Fed Bank of New York’s website.

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, widened one basis point to 2.49 percentage points. The average during the past decade is 2.17 percentage points.

Ten-year yields will climb to 2.06 percent by June 30, according to a Bloomberg survey.

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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