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Treasuries Gain as Stock Losses Boost Safety Demand Before Fed

Treasury 10-year notes rose for the first time in three days after a drop in global stocks as Federal Reserve policy makers prepared to meet spurred demand for the relative safety of government debt.

Two-year note yields earlier slid to almost the lowest level since May on speculation the central bank will reiterate tomorrow its pledge to keep borrowing costs low for an “extended period.” The Treasury will sell $40 billion of the securities today, $2 billion less than the previous offering.

“It’s likely that Fed policy will contribute to yields staying at fairly low levels for some time,” said Elwin de Groot, a senior market economist at Rabobank Groep in Utrecht, Netherlands. “We’ve seen a slight improvement in risk appetite, but the underlying tone remains downbeat.”

The 10-year note yield dropped two basis points, or 0.02 percentage point, to 3.23 percent at 6:59 a.m. in New York, according to BGCantor Market Data. The price of the 3.5 percent security maturing in May 2020 rose 5/32, or $1.56 per $1,000 face amount, to 102 10/32.

Yields on two-year notes fell less than one basis point to 0.71 percent after earlier touching 0.70 percent. They reached 0.69 percent on June 17, the lowest level since May 25.

The Stoxx Europe 600 Index decreased for the first time in 10 days, dropping 1.3 percent. Standard & Poor’s 500 Index futures expiring in September lost 0.4 percent.

The rating of BNP Paribas SA, France’s largest bank, was cut one step yesterday to “AA-,” the fourth-highest investment grade, by Fitch Ratings, citing a “deterioration” of the company’s asset quality.

Noyer’s View

European Central Bank governing council member Christian Noyer said some lenders are facing funding problems as a consequence of the sovereign-debt crisis.

“The situation reflects a general state of uncertainty which, left unchecked, could have significant consequences on financial stability and the real economy, as was the case during the last part of 2008,” Noyer said at a conference in Paris yesterday.

The Federal Open Market Committee will hold the benchmark interest rate at a record low range of zero to 0.25 percent at this week’s meeting, according to all of the 96 economists surveyed by Bloomberg News. Policy makers have kept the Fed funds rate unchanged since December 2008.

The difference in yield between five-year Treasuries and Treasury Inflation Protected Securities indicates investors anticipate an inflation rate of 1.69 percent in the next five years, compared with 2.01 percent on April 28, when policy makers concluded their last meeting on monetary policy.

Outlook for FOMC

“The FOMC is not going to move, and the language is not going to change because it’s too early for the Fed to even contemplate moving rates,” said Kumar Palghat, who helps manage the equivalent of $1.6 billion at Kapstream Capital in Sydney. “Economic data in the U.S. is mixed, and you still have the European overhang.”

In addition to today’s two-year note sale, the Treasury will also auction $38 billion in five-year notes tomorrow and $30 billion in seven-year securities on June 24.

Indirect bidders, an investor class that includes foreign central banks, bought 36 percent of the two-year notes at the $42 billion U.S. sale on May 25, compared with an average of 42 percent over the past 10 sales.

“The auction should be reasonably tightly bid,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London. “Two-year auctions are generally not a great challenge for the market, particularly not in this current environment.”

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