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U.S. 10-Year Yields Reach 6-Week Low; Bill Rates Fall to Record

May 3 (Bloomberg) -- Treasury 10-year yields fell to a six-week low as a report yesterday showed U.S. manufacturing growth slowed in April, the Federal Reserve bought bonds and before a nonfarm payroll report data forecast to show slower job growth.

Six-month bill rates fell to a record as the U.S. reduces short-term debt sales as fiscal policy makers discuss spending cuts amid efforts to raise the $14.3 trillion debt ceiling and the Fed keeps its overnight interest rate target at zero to 0.25 percent. Treasury yields fell below German bunds for 10-year debt for the first time since June 2009. The Fed purchased $7.7 billon of Treasuries due from November 2016 to April 2018 today.

“The Fed’s continuing to buy so much paper every day,” said Anthony Cronin, a Treasury trader at Societe Generale in New York, one of the 20 primary dealers that trade with the Fed. “People are really taking Congressional leaders seriously when they say they want to reduce the deficit, and you’re looking at a fiscal contraction, which will slow the economy.”

Ten-year yields fell two basis points to 3.25 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices, the lowest since March 18. The price of the 3.625 percent note maturing in February 2021 rose 1/4, or $2.50 per $1.000 face value, to 103 1/8.

Treasury yields rose in June 2009 as Fed asset purchases led investors to sell the debt in favor of riskier assets, while German yields fell as the German economy weakened on rising unemployment and slumping sales.

Bills Fall

Six-month bill rates fell to a record 0.0742 percent. The Treasury has cut the amount of Supplementary Financing Program bills, or SFPs, it sells on behalf of the Fed by $195 billion to help avoid exceeding the U.S. debt limit. Congress is facing a vote as early as this month on raising the debt ceiling.

With three-month bills trading at a rate of 0.02 percent, some demand has moved down the short-term yield curve. The $24 billion one-year bill auction today prices at 0.20 percent, the lowest since at least 1990 when the government began releasing the data.

The three-month bill yield is the lowest since December 2008 after the Fed said it would consider buying Treasuries to help bolster the economy and financial markets, while one-month bills are yielding the least since January 2010 when the Treasury cut back sales of the securities.

Investors should purchase six-month bills as the Treasury may make additional cutbacks to its short-term issuance as a deal to raise the federal debt ceiling may be hard to reach, and as the government has reduced its estimated borrowing needs, Credit Suisse Group AG strategists Carl Lantz and Scott Sherman said in a note to clients published today.

“With concerns about a deadlock on the debt ceiling, we believe the Treasury will effect additional cuts in Treasury bill issuance in order to preserve its issuance of benchmark coupon debt,” Lantz and Sherman, both based in New York, wrote.

Debt Maneuvers

U.S. Treasury Secretary Timothy Geithner said the U.S. will have three weeks more than previously seen before hitting its borrowing limit, giving the White House and Congress more time for a deal to raise the debt ceiling.

The U.S. can borrow until Aug. 2 after reaching the debt limit because of “stronger-than-expected tax receipts” and by taking “extraordinary measures” such as suspending the sale of bonds to finance state and local infrastructure projects, Geithner said in a letter to congressional leaders yesterday. He previously said the deadline would be July 8. Without such measures, the legal limit will be reached May 16, he said.

Bill Gross, who runs the world’s biggest mutual fund at Pacific Investment Management Co., said a federal funds target at virtually zero poses an immediate threat to bondholders amid rising inflation and negative real yields.

Wrong Hold

“There should be little doubt that simply holding Treasuries at these yield levels for an extended period of time represents an abdication of responsibility,” Gross wrote in a monthly investment outlook posted today on Pimco’s website.

Goldman Sachs Group Inc. dropped its recommendation for investors to bet against U.S. five-year notes, citing Federal Reserve comments and the pace of inflation, wrote Francesco Garzarelli, Goldman’s London-based chief interest-rate strategist, in a report to clients.

“The trade performed well through mid-April until a combination of dovish Fed comments, slightly softer-than-expected inflation prints, and ongoing concerns that high fuel prices will hit consumer spending triggered a wave of short covering,” the report said.

Fed Chairman Ben S. Bernanke signaled April 27 that the central bank will maintain its record stimulus after it ends large-scale bond purchases. The Fed has kept its key rate at zero to 0.25 percent since December 2008 and is aiming to boost growth by completing $600 billion of Treasury purchases through June.

Banker Views

Federal Reserve Bank of Kansas City President Thomas Hoenig said the central bank should begin withdrawing its monetary stimulus as part of efforts to “calm” concerns about inflation in the U.S. There is a “pretty high” likelihood that the economy will keep expanding after growth in the first quarter was weaker than anticipated, Hoenig told reporters today in Washington.

A Labor Department report on May 6 may show the U.S. added jobs for a seventh month in April. Payrolls rose by 185,000 workers last month after a 216,000 advance in March, the median forecast in a Bloomberg News survey shows.

“Recent economic numbers have not been as good as expected and people are getting less optimistic on growth and the Fed is still buying, which is supporting bonds,” said Larry Milstein, managing director in New York of government debt trading at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors.

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

To contact the editor responsible for this story: Dave Liedtka dliedtka@bloomberg.net

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