Treasury Yields Fall to Lowest in 6 Weeks on Fed Before Auctions

Treasury 10-year (USGG10YR) note yields fell to the lowest level in six weeks as investors bet the Federal Reserve will remain accommodative as it awaits a pick-up in economic growth, stoking demand for government debt.

Two-year note yields were about two basis points from a six-week low before the U.S. sells $33 billion of the debt at an auction today. Benchmark 10-year notes extended a third day of gains after a gauge of consumer confidence fell this month. The Fed last week maintained its policy of buying $85 billion of debt a month to put downward pressure on borrowing costs, causing investors to push back forecasts for when the central bank will raise interest rates.

“Momentum remains relatively constructive in the Treasury market in the wake of the Fed’s decision not to taper,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “The market is grinding a little bit higher.”

The benchmark 10-year note yield fell five basis points, or 0.05 percentage point, to 2.65 percent at 11:53 a.m. in New York, based on Bloomberg Bond Trader data, after declining five basis points in the previous two trading days. The yield is the lowest since Aug. 13. The price of the 2.5 percent security due in August 2023 added 13/32, or $4.06 per $1,000 face value, to 98 22/32.

The two-year note yielded 0.33 percent after dropping to 0.31 percent on Sept. 19, the lowest level since Aug. 13. The yield reached 0.53 percent on Sept. 6, a more than two-year high.

Long Bets

The Treasury also plans to sell $35 billion of five-year notes tomorrow and $29 billion of seven-year debt the next day.

The securities being sold today yielded 0.36 percent in pre-auction trading, compared with 0.386 percent at a previous auction on Aug. 27. Investors bid for 3.21 times the amount of debt offered last month, versus the average of 3.40 times for the last 10 of these monthly sales. Indirect bidders purchased 19.3 percent of the securities, the least since January.

Investors in Treasuries (BUSY110) were long this week, betting that the prices of the securities will rise, according to a survey by JPMorgan Chase & Co.

The proportion of net longs remained steady at 8 percentage points in the week ending yesterday, according to JPMorgan, matching the position in the week ending Sept. 16. Outright longs dropped to 19 percent, from 21 percent, while outright shorts dropped to 11 percent from 13 percent. Investors raised neutral bets to 70 percent from 66 percent.

Debt Ceiling

There’s a “gradual acceptance by the market that the fed will remain accommodative,’ said Aaron Kohli, an interest-rate strategist in New York at BNP Paribas SA, one of 21 primary dealers that trade with the Fed. ‘‘The market is going to be grinding to lower yields over the next few months.’’

Treasuries due in one to 10 years have returned 0.1 percent this quarter as of yesterday, based on the Bloomberg World Bond Indexes. U.S. government securities maturing in a decade and longer dropped 2.9 percent.

The market for U.S. government debt has yet to react to any potential impasse over raising the borrowing ceiling. Most federal operations would come to a halt when the fiscal year ends Sept. 30 if President Barack Obama’s administration and lawmakers can’t agree on a funding plan.

Treasuries that mature on Oct. 15 yielded 0.035 percent, from 0.037 percent two weeks ago. The rate on debt due Nov. 7 has held within two basis points of zero during the period.

Home Prices

Treasuries remained higher today as a report showed home prices in 20 U.S. cities rose in the 12 months through July by the most in more than seven years, helping boost owner equity.

The S&P/Case-Shiller index of property values in 20 cities increased 12.4 percent from July 2012, matching the median projection of 31 economists surveyed by Bloomberg and the biggest year-to-year advance since February 2006, a report from the group showed today in New York.

The Conference Board’s index of U.S. consumer confidence decreased to 79.7 in September from a revised 81.8 a month earlier, data from the New York-based private research group showed today. The Richmond Fed’s manufacturing index tumbled to zero from 14.

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Neal Armstrong in London at narmstrong8@bloomberg.net

To contact the editor responsible for this story: Robert Burgess at bburgess@bloomberg.net

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.