U.S. Debt Rises as 10-Year Yield Near 6-Month High Spurs Buying

Treasuries advanced for the first time in three days as the 10-year note yield at almost a six-month high attracted investors speculating that it will be hard for U.S. debt to drop further.

Benchmark 10-year notes rose after their biggest two-day slump since 2008 following the agreement of President Barack Obama this week to extend for two years tax cuts enacted under his predecessor. The 30-year security gained before the $13 billion auction of the debt today, the last of three note and bond sales totaling $66 billion.

“We are gaining some support as the market is trying to find a bottom to the recent sell-off,” said Thomas L. di Galoma, head of U.S. rates trading in New York at Guggenheim Partners LLC, a brokerage for institutional investors. “The 30-year auction is the main focus of the day. What kind of demand we will see will be the driver of rates.”

The yield on the 10-year note fell four basis points, or 0.04 percentage point, to 3.24 percent at 12:04 p.m. in New York, according to BGCantor Market Data. The price of the 2.625 percent security maturing in November 2020 rose 10/32, or $3.13 per $1,000 face amount, to 94 26/32.

U.S. debt briefly pared its gains after the Federal Reserve purchased fewer seven-year notes today under its program of quantitative easing than some investors expected.

The Fed bought $8.309 billion of Treasuries maturing from November 2016 to November 2017. The central bank had said it would consider purchases of $7 billion to $9 billion of debt due from June 2016 to November 2017.

‘More Expectation’

“The Fed still bought a lot of the sector, but there was more expectation,” said Brian Edmonds, head of interest rates in New York at Cantor Fitzgerald LP, one of 18 primary dealers that trade with the Fed.

The central bank is preparing to meet Dec. 14 after announcing last month a $600 billion second round of debt buying through June. The Fed expects to reinvest $250 billion to $300 billion of proceeds from mortgage-backed debt and agency securities into Treasuries during that time.

Buying more U.S. government bonds than already announced is “certainly possible,” Fed Chairman Ben S. Bernanke said in an interview broadcast Dec. 5 on CBS Corp.’s “60 Minutes” program. “It depends on the efficacy of the program” and the outlook for inflation and the economy, Bernanke said.

Initial jobless claims in the U.S. fell to 421,000 in the week ended Dec. 4, from a revised 438,000 in the previous week, the Labor Department reported today. The median forecast of 50 economists in a Bloomberg News survey was for a drop to 425,000 from a previously reported 436,000.

Yield Gain

The 10-year note yield increased 35 basis points over the past two days, the biggest such gain since Sept. 19, 2008, when markets were in upheaval following the bankruptcy of Lehman Brothers Holdings Inc. The yield touched 3.33 percent yesterday, the highest level since June 4.

The 30-year bond yield decreased two basis points today to 4.44 percent after rising yesterday to 4.50 percent, the most since May 13. The two-year note yield decreased two basis points to 0.61 percent after touching 0.64 percent today, the highest level since July 28.

The seven-day relative strength index on the 10-year Treasury note yield was at 69.58 after rising to as high as 78 yesterday, according to Bloomberg data. Readings of 70 or above typically indicate yields are poised to fall.

‘Some Footing’

“We’ve gotten some footing after the recent sell-off,” 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 market will look and see Treasuries around these levels offer a good buying opportunity given how high yields have gotten. The Fed is still buying, and things have not gotten that much better, which should still underpin Treasuries to a point.”

Bonds tumbled yesterday for a second day after Obama agreed on Dec. 6 to a two-year extension of current tax rates in exchange for another 13 months of federal unemployment insurance for the long-term jobless and cutting the payroll tax by $120 billion for one year. The president said he would accept a lower rate for the estate tax than Democrats wanted in order to break a stalemate over extending tax cuts passed during the administration of George W. Bush.

‘Accelerating Decline’

“Given the accelerating decline in Treasury prices through yesterday it’s probably reasonable to assume that dealer and investor longs have been scoured,” William O’Donnell, head U.S. government bond strategist in Stamford, Connecticut, at the primary dealer Royal Bank of Scotland Plc, wrote in a note to clients. “We are certainly closer to that magic moment when the steady drone of Fed Treasury purchases comes knocking and suddenly finds few willing sellers at home.” A long is a bet an asset will increase in value.

The 30-year bonds to be sold today yielded 4.45 percent in pre-auction trading, compared with 4.32 percent at the prior sale on Nov. 10. Investors bid for 2.31 times the amount offered last month, compared with 2.49 times on Oct. 14.

At yesterday’s $21 billion 10-year auction, the securities drew a yield of 3.34 percent, compared with the average forecast of 3.307 percent in a Bloomberg News survey of primary dealers. The $32 billion three-year note auction on Dec. 7 attracted the lowest bid-to-cover ratio, a gauge of demand, since February.

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