Benchmark 10-year notes yields rose from a one-month low as the central bank chief said monetary stimulus is supporting the economic expansion with little risk of inflation or asset-price bubbles. U.S. debt rallied the most since November yesterday as investors sought the safety after inconclusive elections in Italy triggered concern Europe’s debt crisis would intensify. Treasury sold $35 billion of five-year securities as part of its $99 billion in note sales this week.
“After the Bernanke talk, the bid for Treasuries faded as the market is taking a breather,” said Guy LeBas, chief fixed- income strategist at Janney Montgomery Scott LLC in Philadelphia, which oversees $12 billion in fixed income assets. “Government policy and the Fed are driving Treasury trading.”
The 10-year yield rose two basis points, or 0.02 percentage point, to 1.88 percent as of 5:01 p.m. New York time, according to Bloomberg Bond Trader prices. The price of the 2 percent note maturing in February 2023 lost 5/32, or $1.56 per $1,000 face amount, to 101 2/32.
The yield reached 1.84 percent, the lowest since Jan. 24. The Standard & Poor’s 500 Index of stocks gained 0.6 percent.
Treasuries of all maturities have returned 0.5 percent this month, while losing 0.4 percent this year, according to Bank of America Merrill Lynch indexes. U.S. debt returned 2.2 percent in 2012.
The 10-year term premium, a model that includes expectations for interest rates, growth and inflation, reached negative 0.73 percent today, the most costly level since Jan. 23. A negative reading indicates investors are willing to accept yields below what’s considered fair value.
Treasury trading volume rose yesterday to $401.6 billion, the highest level since Feb. 1, according to ICAP Plc, the largest inter-dealer broker of U.S. government debt. Daily volume has averaged $292.5 billion this year, compared with $240 billion in 2012.
The five-year securities drew a yield of 0.777 percent, compared with a forecast of 0.771 percent in a Bloomberg News survey of seven of the Fed’s 21 primary dealers. The bid-to- cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.85, versus 2.88 last month and an average of 2.86 at the past 10 sales.
“It suggests that the secondary market is efficiently priced.,” said Scott Sherman, an interest-rate strategist at Credit Suisse Group AG in New York, a primary dealer. “Despite the rally people are more than happy top still buy at these levels. The five-year auction suggests concerns are still alive.”
Indirect bidders, a class of investors that includes foreign central banks, bought 41.7 percent of the notes after purchasing 39.7 percent in January. The average for the past 10 offerings is 40.9 percent.
Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 14.3 percent of the notes compared with an average of 13.2 percent at the past 10 auctions.
The U.S. is scheduled to auction $29 billion of seven-year notes tomorrow. A $35 billion two-year sale yesterday drew purchase orders for 3.33 times the amount offered, the lowest level in 19 months.
U.S. 10-year yields dropped as much as 11 basis points yesterday, the biggest intraday slide since Nov. 7, after Italian results showed pre-election favorite Pier Luigi Bersani won the lower house by less than a half a percentage point, while Silvio Berlusconi, the former premier fighting a tax-fraud conviction, won a blocking minority in the Senate.
Money manager Kenneth Heebner, convinced that a growing U.S. economy will eventually prompt the Federal Reserve to boost interest rates, has bet 21 percent of his CGM Focus Fund on a decline in U.S. Treasuries. The $1.44 billion fund, which Heebner uses to make concentrated wagers on stocks, had sold short $300 million of U.S. Treasury bonds at the end of last year, according to a filing with the U.S. Securities and Exchange Commission. That is up from $190 million at the end of the third quarter and $80 million halfway through last year.
The SEC filing showed that CGM Focus had sold short $200 million of 2.75 percent Treasuries and $100 million of 3.125 percent bonds that mature in August and February 2042 respectively.
Bernanke used his testimony to push back against colleagues on the Federal Open Market Committee who favor curtailing the $85 billion in monthly bond-buying amid concern about the growth of the Fed’s record $3.1 trillion balance sheet.
“Bernanke put his dovish slant back out there,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “The market has the need to go higher.”
Fed policy makers cut their target for the federal funds rate, which banks charge each other for overnight loans, to a range of zero to 0.25 percent in 2008. In January, they affirmed their pledge to keep the target near zero “at least as long” as unemployment remains above 6.5 percent and inflation is projected to be no more than 2.5 percent.
The central bank is buying $85 billion of Treasury and mortgage bonds a month to put downward pressure on interest rates. The Fed purchased $1.4 billion of Treasuries maturing from February 2036 to August 2042 today.
Bernanke is scheduled to testify before a U.S. House committee tomorrow.
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