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Treasury Yields at Almost 9-Month High Before Fed Meets

Treasury yields traded close to the highest level in nine months as investors await guidance from the Federal Reserve on whether it will indicate a slowdown in monetary stimulus at the conclusion of today’s policy meeting.

Yields rose as the U.S. sold $29 billion in seven-year notes that drew a yield of 1.416 percent, versus an average forecast of 1.403 percent in a Bloomberg News survey of six of the Fed’s 21 primary dealers. Yields briefly fell after a report showed the U.S. economy unexpectedly contracted in the fourth quarter. The Fed will issue a policy statement at about 2:15 p.m. New York time after a two-day meeting.

“It will be the status quo from the Fed,” said Dan Mulholland, head of U.S. Treasury trading in the capital-markets unit of BNY Mellon Corp. in New York. “The risk is that the Fed has a reputation of being somewhat dovish.”

The 10-year note yield rose two basis points, or 0.02 percentage point, to 2.02 percent at 1:33 p.m. New York time after touching 2.03 percent, the highest since April 25, according to Bloomberg Bond Trader data.

The current seven-year note yield rose one basis point to 1.39 percent after touching 1.403 percent, also the highest since April 25.

Central-bank policy makers said at their last meeting they may end the purchases sometime in 2013, with members divided between a mid- or end-of-year finish, according to the minutes of the Federal Open Market Committee’s Dec. 11-12 gathering.

Fed Buying

Fed Chairman Ben S. Bernanke’s latest round of bond buying will reach $1.14 trillion before he ends the program in the first quarter of 2014, according to median estimates in a Bloomberg survey of economists.

Bernanke will push on with purchases of $40 billion a month of mortgage bonds and $45 billion a month of Treasuries, according to the survey of 44 economists, even as some Fed officials warn his unprecedented balance-sheet expansion will impair efforts to tighten policy when necessary.

Government bonds briefly pared losses after gross domestic product, the volume of all goods and services produced, dropped at a 0.1 percent annual rate, the Commerce Department said, weaker than any economist forecast in a Bloomberg survey. A drop in government outlays and smaller gain in stockpiles cut a combined 2.6 percentage points from growth.

Notes Sale

At today’s sale, the bid-to-cover ratio, which gauges demand by comparing total bids with amount of securities offered, was 2.60, compared with 2.72 last month and an average of 2.71 at the past 10 sales.

Indirect bidders, an investor class that includes foreign central banks, purchased 38.2 percent of the notes sold today, compared with an average of 40.2 percent at the past 10 sales. They bought 39.9 percent of the notes at the December auction.

Direct bidders, non-primary dealer investors that place their bids directly with the Treasury, purchased 19.7 percent of the notes, compared with the 10-auction average of 15.6 percent. Direct bidders purchased 23.1 percent at the December sale, the most in records dating to 2009.

U.S. seven-year Treasury notes have lost 1.3 percent this year, compared with a 1 percent loss for the broader Treasury market, according to Bank of America Merrill Lynch Indexes.

The size of the offering was the same as at the past 30 seven-year note sales after peaking at $32 billion from November 2009 through April 2010.

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

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

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