Treasuries Holds Narrowest Range in Month Before Bernanke Speaks

Treasury 10-year note yields stayed in the tightest range in more than a month before Federal Reserve Chairman Ben S. Bernanke speaks following the conclusion of a two-day policy meeting today.

Investors will be looking for signals as to when the central bank may slow the pace of bond purchases, after data yesterday showed inflation stayed below the Fed’s target and housing starts trailed forecasts. The yield gap between 10-year Treasuries and Treasury Inflation Protected Securities, a gauge of traders’ expectations for consumer prices over the life of the debt, was almost at a 17-month low. The U.S. is scheduled to auction $7 billion in 30-year TIPS tomorrow.

“The Fed will probably remind the market of the economic prerequisites needed for a reduction in bond purchases,” said Kazuaki Oh’e, a debt salesman in Tokyo at CIBC World Markets Japan Inc., a unit of Canada’s fifth-largest lender. “The 10-year yield looks quite comfortable a little above 2 percent, so I doubt it will break below that.”

The benchmark 10-year yield was little changed at 2.18 percent at 10:15 a.m. in Tokyo from yesterday, according to Bloomberg Bond Trader prices. The price of the 1.75 percent security maturing in May 2023 was at 96 5/32. Ten-year note yields traded in a 4.88 basis-point range between 2.216 percent and 2.1673 percent yesterday, the narrowest since May 9.

The 10-year break-even rate was at 2.09 percentage points after touching 2 percentage points on June 13, the lowest level since January 2012. The average over the past 12 months is 2.38 percentage points.

Fed Meeting

The Fed will release a statement and economic forecasts when its meeting ends. Bernanke said in May the central bank could reduce its $85 billion in monthly bond purchases, known as quantitative easing, if there’s sustainable improvement in employment. At the same time, he said a premature tightening of monetary policy might imperil the economic recovery.

The central bank will trim its bond purchases to $65 billion a month at the Oct. 29-30 FOMC meeting, according to a Bloomberg News survey of economists. The central bank will buy up to $3.5 billion of Treasuries maturing in August 2020 to May 2023 tomorrow, the website of the Fed Bank of New York showed.

Data from the Commerce Department yesterday showed housing starts rose 6.8 percent in May to a 914,000 annualized rate, compared to 950,000 in the median estimate of economists polled by Bloomberg.

Below Target

The Labor Department reported yesterday consumer prices increased 1.4 percent in the 12 months ended in May, versus a 1.1 percent year-over-year gain reported in April. The Fed’s inflation target is 2 percent.

Slow inflation gives the Fed room to maintain record economic stimulus as policy makers seek to lower a jobless rate of 7.6 percent.

Investors should buy U.S. 10-year notes as yields rise toward 2.3 percent before the FOMC announcement, William O’Donnell, head U.S. government-bond strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut, a primary dealer, wrote in a note to clients.

Investors should not “be selling into weakness ahead of the meeting on this most recent tapering fear,” O’Donnell wrote. While the Fed “would like to begin the tapering process,” it will probably go “no further than that in advancing the conversation and if anything, being a bit dovish away from that in order to soothe ruffled market feathers.”

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

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