U.S. 30-Year Yields Reach One-Month High Before Fed Ends Meeting

Treasury 30-year bond yields touched the highest level in more than a month before the Federal Reserve concludes a two-day policy meeting at which it’s forecast to decide to buy more Treasuries to spur the economy.

Ten-year yields reached a two-week high before the U.S. sells $21 billion of the securities today amid optimism lawmakers are inching closer to a budget agreement. President Barack Obama reduced his demand for tax increases as he and House Speaker John Boehner traded offers yesterday to try to avoid more than $600 billion in automatic tax increases and spending cuts.

“There’s a lot of 10-year supply, and I assume people want to push it down more before the auction,” said Michael Franzese, senior vice president of fixed-income trading at ED&F Man Capital Markets in New York. “The Fed is going to do something because they feel it’s necessary.”

The 30-year yield increased two basis points, or 0.02 percentage point, to 2.86 percent, the highest since Nov. 7, at 10:34 a.m. New York time, according to Bloomberg Bond Trader prices. The price of the 2.75 percent bond due in November 2042 declined 11/32, or $3.44 per $1,000 face amount, to 97 26/32.

The benchmark 10-year note yield advanced one basis point to 1.67 percent, the highest since Nov. 27.

The Fed’s Operation Twist program, in which it sells shorter-maturity Treasuries in its holdings and buys longer- dated sovereign debt, is set to expire at the end of this month. The central bank also is purchasing $40 billion in mortgage bonds each month to spur the economy.

Today’s Auction

The notes to be sold today yielded 1.675 percent in pre- auction trading, matching the yield at the previous sale on Nov. 7. The record auction low, 1.459 percent, was reached at the July offering. The Treasury is due to announce today’s results at about 11:30 a.m. Washington time.

Investors bid for 2.59 times the amount of available debt at last month’s 10-year note sale, down from 3.26 on Oct. 10. Indirect bidders, a category that includes foreign central banks, bought 39.7 percent of the securities at the November offering, versus 41.4 percent the month before.

The U.S. sold $32 billion of three-year notes yesterday at a record-low yield of 0.327 percent. The bid-to-cover ratio, which gauges demand by comparing the number of bids to the amount of securities sold, fell to 3.36 from 3.41 in November. The government is scheduled to auction $13 billion of 30-year bonds tomorrow.

Fed Meeting

The Federal Open Market Committee will announce today that the central bank will begin buying $45 billion in Treasuries each month that will increase its balance sheet to almost $4 trillion, according to a Bloomberg survey of economists.

All but one of 49 economists forecast the FOMC will purchase the securities to bolster the existing program to buy mortgage bonds. Policy makers pledged in October to continue that plan until the labor market improves “substantially.”

As Fed Chairman Ben S. Bernanke considers whether to worry about inflation before adding to his record monetary stimulus today, he has the bond market on his side.

Debt traders are anticipating prices will accelerate at the Fed’s target rate of about 2 percent during the next five years. The break-even rate for five-year Treasury Inflation Protected Securities -- the yield difference between the inflation-linked debt and Treasuries -- was 2.07 percentage points yesterday. That’s a measure of the outlook for consumer prices over the life of the securities.

Obama, Boehner

The Fed ends its policy meeting a day after Obama reduced his demand for tax increases to $1.4 trillion from $1.6 trillion in the budget negotiations. A failure to reach an accord will push the economy over the fiscal cliff of automatic spending cuts and tax boosts.

The two sides remain hundreds of billions of dollars apart on taxes and spending, and they continue to disagree on whether a year-end deal should include an increase in the debt limit and fresh programs to boost the economy.

Obama and Boehner spoke by telephone yesterday, according to a Republican congressional aide and an administration official.

Bank of America Merrill Lynch’s MOVE index, which measures price swings of U.S. government securities based on options, fell to 51.6 basis points yesterday. It dropped to 51 on Dec. 3, the lowest on record going back to April 1988. Volatility climbed to 264.6 basis points in October 2008 as the global financial crisis intensified.

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

To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net

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