Treasuries Rise as Beige Book Shows Growth Slowed in Some Areas

Treasuries gained, pushing five-year yields down the most in almost two weeks, as a Federal Reserve survey said U.S. economic growth slowed in some areas, boosting the haven appeal of the safest fixed-income securities.

U.S. notes rose earlier after the government sold $37 billion of five-year securities in the smallest auction of the debt in a year, the second of three note sales this week totaling $104 billion. A report today showed durable-goods orders last month unexpectedly fell.

“The same issues that have been with us are still with us,” said Kevin Giddis, head of fixed-income sales, trading and research at brokerage firm Morgan Keegan Inc. in Memphis, Tennessee. “The economy is in a very slow recovery mode and in some districts it got even slower. It’s very positive for the auction tomorrow.”

The yield on the current five-year note dropped 9 basis points, the most on an intraday basis since July 16, to 1.70 percent at 3:54 p.m. in New York, according to BGCantor Market Data. The 1.875 percent security due in June 2015 rose 13/32, or $4.06 per $1,000 face amount, to 100 25/32. The benchmark 10-year note yield fell 5 basis points, or 0.05 percentage point, to 3.0 percent.

The central bank’s report, a review of economic conditions in the Fed’s 12 district banks over the past two months, said “nearly all districts reported sluggish housing markets” since a tax credit for homebuyers expired April 30. The survey, known as the Beige Book, said several districts reported manufacturing “slowed or leveled off.” Still, it said, “economic activity has continued to increase, on balance, since the previous survey.”

‘Unusually Uncertain’

The Beige Book is published two weeks before policy makers meet on interest rates.

The survey underscored the Fed’s view that the recovery, while still moving forward, is progressing at a slower pace than earlier in the year. Fed Chairman Ben S. Bernanke said July 21 “the economic outlook remains unusually uncertain.”

U.S. gross domestic product growth slowed to 2.5 percent in the second quarter, versus 2.7 percent in the previous three months, according to the median estimate in a Bloomberg survey before the government reports the figure on July 30.

Orders for durable goods declined 1 percent last month, after a revised 0.8 percent slide in May, a Commerce Department report showed today. The median forecast in a Bloomberg survey was for a 1 percent increase.

30-Year Bonds

Even as Treasury notes rose today, U.S. 30-year bond yields touched a two-week high, and the gap between them and yields on 10-year Treasuries reached the widest since July 2003.

“People are reluctant to take the view of low growth and low inflation out beyond the intermediate part of the curve,” said James Caron, head of U.S. interest-rate strategy in New York at Morgan Stanley, one of 18 primary dealers that are obligated to bid at Treasury auctions.

The yield gap increased as much as 5 basis points to 107 basis points. Thirty-year yields rose as much as 3 basis points to 4.11 percent, the highest since July 14, before trading little changed at 4.08 percent.

Today’s auction drew a yield of 1.796 percent, compared with an average forecast of 1.820 percent in a Bloomberg News survey of 7 primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with total securities offered, was 3.06, the highest level since August 2006.

‘Safety, Liquidity’

“People are looking at safety, liquidity and inflation,” William Larkin, a fixed-income portfolio manager in Salem, Massachusetts, at Cabot Money Management, which manages $500 million, said. “The fear trade is still alive and well.”

Today’s offering was the smallest of five-year notes since June 2009. Its yield was the lowest since December 2008.

Indirect bidders, an investor class that includes foreign central banks, purchased 47.3 percent of the notes today, compared with 34.6 percent at the June auction and an average of 46.16 percent for the past 10 sales. Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 11.4 percent of the notes, compared with an average of 10.1 percent at the past 10 auctions.

“Investors are still bullish at these rates,” said Sergey Bondarchuk, an interest-rate strategist in New York at primary dealer BNP Paribas. “The economy isn’t likely to recover at a strong pace. It will be moderate.”

The Treasury sold $38 billion in two-year debt yesterday at a record low yield of 0.665 percent and will auction $29 billion of seven-year notes tomorrow.

The difference in yield between five-year Treasuries and Treasury Inflation Protected Securities indicates investors anticipate an inflation rate of 1.41 percent in the next five years, compared with a five-year average of 1.86 percent.

Futures on the CME Group Inc. exchange show traders have reduced the chance to 42 percent that policy makers will raise their target lending rate for overnight bank loans by April, from 54 percent odds a month ago.

Policy makers cut the benchmark interest rate to a range of zero to 0.25 percent in December 2008 to foster economic growth.

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