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Treasuries Rally as Bernanke’s Comments Boost Demand at Auction

Treasuries rose, pushing yields to the lowest level since December, as Federal Reserve Chairman Ben S. Bernanke’s comments yesterday that record monetary stimulus is still needed bolstered demand at today’s $21 billion auction of 10-year notes.

Yields on the benchmark debt fell before the central bank’s Beige Book survey showed the economy “generally” grew while slowing in some areas. The extra yield investors demand to hold 30-year bonds instead of two-year debt was almost the highest since March on speculation interest rates will stay low.

“A lot of people have been forced into the market,” said Thomas Tucci, head of U.S. government bond trading at RBC Capital Markets in New York. “It’s a liquidity event where people had to cover shorts. The participation in the auction was solid. The economic news continues to remain weak.” As one of the 20 primary dealers, the unit of Royal Bank of Canada is obliged to participate in U.S. debt offerings.

Yields on the 10-year notes dropped six basis points, or 0.06 percentage point, to 2.94 percent at 5 p.m. in New York, according to BGCantor Market Data. The 3.125 percent security maturing in May 2021 increased 15/32, or $4.69 per $1,000 face amount, to 101 19/32.

The 10-year note yields touched 2.93 percent, the lowest level since Dec. 7. Two-year note yields slid two basis points to 0.38 percent after touching 0.37 percent, the lowest level since Nov. 8. A gain of more than one point in the 30-year bond pushed yields down seven basis points to 4.19 percent.

Auction Demand

At today’s 10-year note auction, the securities drew a yield of 2.967 percent, versus the average forecast of 2.961 percent in a Bloomberg News survey of seven primary dealers.

The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.23, compared with an average of 3.09 at the past 10 auctions.

Indirect bidders, an investor class that includes foreign central banks, bought 50.6 percent of the notes at today’s auction, compared with 47.2 percent at the May sale. The average for the past 10 auctions is 51.1 percent.

Direct bidders, non-primary dealer investors that place their bids directly with the Treasury, purchased 8.3 percent, compared with the 10-auction average of 7.8 percent.

“It was a pretty fair auction that came near the highs of the day,” said Justin Lederer, an interest-rate strategist in New York at Cantor Fitzgerald, a primary dealer. “With the future uncertain, investors are grabbing as much yield as possible, even if we aren’t at amazing yield levels. The market is playing it safe right now.”

Debt Returns

Ten-year notes have returned 4.3 percent this year, compared with a 2.8 percent gain for Treasuries overall, according to Bank of America Merrill Lynch indexes.

The U.S. sold $32 billion of three-year debt yesterday at a yield of 0.765 percent, drawing the highest demand from indirect bidders since January. The government will sell $13 billion in 30-year securities tomorrow in the last of this week’s $66 billion of note and bond sales.

Treasuries rose earlier after Bernanke said yesterday at an Atlanta conference that record monetary stimulus is still needed to boost a “frustratingly slow” recovery, reiterating that an acceleration in inflation is likely to prove temporary.

“The economy is still producing at levels well below its potential; consequently, accommodative monetary policies are still needed,” Bernanke said. At the same time, the Fed “will take whatever actions are necessary to keep inflation well controlled,” he said.

Bernanke on Growth

Bernanke said growth is likely to pick up in the second half of the year as fuel prices recede and disruptions of parts supplies dissipate with factories in Japan recovering from the March earthquake and tsunami.

Reports from the Fed’s district banks “indicated that economic activity generally continued to expand since the last report, though a few districts indicated some deceleration,” the central bank said today in its Beige Book survey.

Manufacturing “continued to expand in most parts of the country,” while slowing in some areas. Consumer spending was “mixed,” the report said, while the job market improved “gradually across most of the nation.”

The difference in yield between 2- and 30-year debt was 3.80 percentage points. The spread increased yesterday to 3.85 percentage points, the widest since March, on the prospect of low interest rates.

Futures contracts showed the likelihood of an increase in the fed funds target by the March 2012 meeting fell to 22 percent, from 38 percent odds a month ago. The target rate for overnight lending between banks has been zero to 0.25 percent since December 2008.

The Fed purchased $6.4 billion of debt maturing from July 2015 to May 2016 today under its $600 billion second round of quantitative easing. The program, also known as QE2, expires this month.

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