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U.S. 10-Year Yield Falls to 2-Month Low on Emerging Markets

Treasury 10-year note yields fell to the lowest level in two months as investors sought a haven from emerging-market turmoil even with the Federal Reserve forecast to announce a second reduction in its bond-buying program.

The benchmark yields dropped for the first time in three days as the lira weakened from a two-week high even after Turkish policy makers doubled the main interest rate and South Africa boosted its lending benchmark. A Fed policy announcement is projected to include a $10 billion cut to bond purchases. The Treasury’s initial sale floating-rate notes drew robust demand as investors sought alternative money-market securities.

“It’s the fear trade,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “The lira gave up its gains this morning. It’s the panic that this is going to become a contagion. Guys are buying Treasuries on the back of that.”

The yield on the benchmark 10-year note fell four basis points, or 0.04 percentage point, to 2.71 percent at 1:15 p.m. New York time. The price of the 2.75 percent note due in November 2023 added 3/8, or $3.75 per $1,000 face amount, to 100 3/8. The yield fell as low as 2.70 percent, touching the least since Nov. 26.

Floating Debut

The first U.S. floating-rate notes were sold with a high discount margin of 0.045 percent. The spread over three-month Treasury bills, the security’s benchmark, was the same at 0.045 percent. The bid-to-cover ratio, which gauges demand by comparing the number of bids with the amount of securities sold, was 5.67.

“The sale came extraordinarily well,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee. “The floaters are money-market yields without the headaches. From the beginning the floaters have had ‘winner’ stamped all over it. And the securities came at the perfect time.”

The debt offers investors a short-term security that’s a hedge against a potential rise in interest rates. The securities are considered short term because they are benchmarked to a short-term index -- the high rate from a 13-week bill. The rate at which interest will accrue on the notes will be re-set daily.

The Treasury plans to sell more floating-rate notes in April, July and October, with two re-openings in the subsequent months of each quarter.

Investors will bid for $35 billion of five-year securities and $29 billion of seven-year debt Jan. 30.

Bill Rates

Rates on Treasury bills maturing in March fell by as much as two basis points as concern about a potential U.S. debt ceiling impasse waned and investors sought safe assets amid declines in emerging markets. The security due March 6 dropped by 0.5 basis point to 0.08 percent. It had traded as high as 0.11 percent on Jan. 27.

Investors are betting there “will be some drama out of Washington, but we’re not going to get to the point we were in October,” said Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York.

The last debt-limit debate ended Oct. 17, the day Treasury Secretary Jacob J. Lew had said the U.S. would exhaust its borrowing authority and President Barack Obama signed legislation to suspend the limit until Feb. 7 and end a 16-day partial government shutdown.

Lew reiterated a call last week for Congress to raise the federal debt ceiling as soon as possible. The Treasury estimates that extraordinary measures used to stay within the limit will run out in late February.

Fed Policy

The Federal Open Market Committee will cut purchases of Treasury and mortgage debt for a second time to $65 billion a month, from $75 billion, as it concludes a two-day meeting today, according to a Bloomberg News survey of economists on Jan. 10. The central bank will scale down the program by $10 billion at each subsequent meeting to end the purchases this year, the analysts forecast. A policy statement is scheduled for 2 p.m. New York time.

The Fed, which buys Treasuries maturing in four to 30 years, said last month it will keep the benchmark rate target at a range of zero to 0.25 percent as long as the jobless rate remains above 6.5 percent and inflation is in check.

Turkish central bank Governor Erdem Basci is fighting to arrest a currency run after a corruption scandal that broke last month ensnared several cabinet members. The political fallout coincided with an outflow of money from emerging economies including Brazil as the U.S. reduces monetary stimulus.

The exodus prompted the South Africa Reserve Bank to unexpectedly increase its benchmark interest rate. The Monetary Policy Committee lifted the repurchase rate to 5.5 percent from 5 percent, Governor Gill Marcus told reporters in Pretoria today. All 25 economists surveyed by Bloomberg last week said the rate would stay unchanged as the central bank focuses on supporting an economy buffeted by slower global demand and mining strikes.

Market Reaction

“While hiking rates in emerging markets might stem the capital flow, it’s also going to potentially slow those economies,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “That’s another incentive to want to get out of emerging market investments. We’ve seen exposure to emerging markets scale back, and that’s been to the benefit of Treasuries.”

The Bloomberg U.S. Treasury Bond Index (BUSY) has risen 1.3 percent in the past month through yesterday. The Standard & Poor’s 500 Index (SPX) of U.S. shares have lost 2.9 percent including reinvested dividends.

To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; 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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