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Treasury 10-Year Yields Are Near 17-Month Low on Growth Concern

Treasury 10-year yields held near the lowest level in 17 months as concerns the world’s largest economy is losing momentum fueled demand for the relative safety of government debt.

Yields on benchmark 10-year debt slid below 2.5 percent for the first time since March 2009 yesterday and those on two-year notes reached a record low after a report that sales of existing homes tumbled in July. Economists say a report this week will show economic growth moderated, supporting the Federal Reserve’s willingness to extend accommodative monetary policy. Gains were tempered before the government sells $36 billion in five-year debt today and $29 billion in seven-year securities tomorrow.

“Growing uncertainties about the U.S. economy and the rest of the world add to speculation that the Federal Reserve may extend credit easing, or even enhance it,” said Hideo Shimomura, who helps oversee the equivalent of $53.3 billion in Tokyo as chief fund investor at Mitsubishi UFJ Asset Management Co., a unit of Japan’s biggest bank. “Ten-year yields may fall below 2 percent.”

The yield on the 10-year note was little changed at 2.50 percent at 10:05 a.m. in Tokyo, according to BGCantor Market Data. The price of the 2.625 percent security maturing in August 2020 fell 3/32 or $0.94 per $1,000 face amount to 101 3/32. The yield slid to 2.4668 percent yesterday, a 17-month low.

The two-year note yield was at 0.48 percent after touching a record low of 0.4542 percent yesterday and the yield on the 30-year bond stood at 3.56 percent after falling to 3.54 percent, the lowest since April 2009.

Economic Data

A Commerce Department update on Aug. 27 will show the economy grew 1.4 percent in the second quarter, the slowest rate since the recovery began in the middle of last year, according to a Bloomberg News survey.

The National Association of Realtors reported yesterday that sales of existing homes dropped 27 percent in July after a revised 7.1 percent reduction in the previous month. The median forecast of 74 economists in a Bloomberg News survey was for a 13.4 percent drop.

“The housing data was ugly and extremely weak, which is clearly a concern given the fragile state of the economy,” said Larry Milstein, managing director of government and agency debt trading in New York at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors. “The concern now is that the Fed might need to do more than reinvest interest income and proceeds from maturing bonds.”

Fed Chairman Ben S. Bernanke will discuss the outlook for the economy on Aug. 27 at a conference in Jackson Hole, Wyoming.

Futures trading on the CME Group exchange showed a 30 percent chance the Fed will cut the target rate for overnight bank lending by its November meeting, up from a 25.4 percent probability one month ago.

Debt Auction

Treasuries pared yesterday’s gains on concerns steep declines in yields may deter buyers at forthcoming auctions.

The five-year Treasury notes being sold today yielded 1.35 percent in pre-auction trading, dropping from 1.796 percent at the previous sale on July 28. Investors bid for 3.06 times the amount on offer last month, versus the average of 2.72 times for the past 10 auctions.

Indirect bidders, the category of investors that includes foreign central banks, bought 47.3 percent of the notes, versus the 10-sale average of 46.4 percent.

‘Unsustainable’ Yields

“Treasuries’ yields have already fallen to unsustainable levels,” said Hiroki Shimazu, an economist in Tokyo at Nikko Cordial Securities Inc., a unit of Japan’s third-largest publicly traded bank. “The latest Fed action is not enough to offset swelling debt.”

The two-year Treasury auction yesterday drew a record low yield of 0.498 percent. The sale’s bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.12, compared with an average of 3.19 at the past 10 auctions.

The $7 billion sale this week of 30-year Treasury Inflation Protected Securities, or TIPS, drew a yield of 1.768 percent, the lowest ever for sales of the debt dating to 1998. The bid-to-cover ratio was a record high 2.78.

Altogether, the $102 billion of notes being sold this week is the smallest total for this combination of securities since May 2009.

In an attempt to bolster the economy, policy makers said on Aug. 10 that the central bank would maintain its holdings of securities at $2.05 trillion to prevent money from draining out of the financial system.

The central bank will purchase about $18 billion of U.S. debt by the middle of September using the money from principal payments on its holdings of agency debt and agency mortgage- backed securities. The Fed bought $1.35 billion of Treasuries yesterday, increasing the total to $7.51 billion since the program began Aug. 17.

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