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Treasuries Up on Bernanke, Europe; Record Low Yield at Note Sale

Treasuries rose as the U.S. sold $29 billion in seven-year notes at a record low yield amid speculation Federal Reserve Chairman Ben S. Bernanke may disappoint investors betting on additional economic stimulus.

U.S. debt snapped three days of losses amid declines in stocks as European regulators extended bans on short-selling amid volatility. The seven-year notes drew a yield of 1.58 percent a day before Bernanke speaks at a conference in Jackson Hole, Wyoming. Commerce Department figures tomorrow may show the economy grew at a 1.1 percent annual pace in the second quarter, down from the 1.3 percent the government estimated last month, according to the median forecast of 80 economists in a Bloomberg News survey.

“People are just looking to go into Bernanke’s speech tomorrow with as little risk as possible,” said Anthony Cronin, a trader at Societe Generale SA in New York, one of the Fed’s 20 primary dealers. “It was a good auction. Risk appetites are really low.”

Yields on 10-year notes fell seven basis points, or 0.07 percentage point, to 2.23 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. The 2.125 percent securities maturing in August 2021 advanced 20/32, or $6.25 per $1,000 face amount, to 99 2/32.

Yields on the current 2.25 percent seven-year notes due July 2018 fell seven basis points to 1.54 percent. The yield touched a record low 1.31 percent on Aug. 18.

Note Yields

The 10-year note yield fell on Aug. 18 to the historical low of 1.97 percent, while the yield on the five-year note fell that day to a record of 0.79 percent. Two-year note yields reached a record low of 0.1568 percent on Aug. 9.

Today’s record auction yield compares with the average forecast of 1.575 percent in a Bloomberg News survey of 10 of the Federal Reserve’s primary dealers. The previous record low auction yield was 1.89 percent in September 2010.

The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.76, compared with 2.63 at the July offering and an average of 2.82 at the past 10 sales.

Indirect bidders, an investor class that includes foreign central banks, purchased 51.7 percent of the notes, the most since January.

Bidder Numbers

Direct bidders, non-primary dealer investors that place their bids directly with the Treasury, purchased 7.9 percent of the notes, compared with 9.3 percent last month and an average of 8 percent at the last 10 sales.

Today’s offering is the third of three auctions of U.S. notes this week totaling $99 billion. The Treasury sold $35 billion of five-year debt yesterday at a yield of 1.029 percent and the same amount of two-year securities on Aug. 23 at 0.222 percent, both record auction lows.

Treasuries saw increased demand after a government report earlier showed initial jobless claims unexpectedly increased last week, fueling concern the economic recovery is slowing and stoking demand for U.S. debt.

“The claims numbers reiterated that there are still issues out there that the market has to deal with,” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities Inc. in New York. “Everyone is waiting for Bernanke to come in. The more unimpressed people are about the economy, the more pressure it puts on Bernanke to do something.”

Economic Status

Bernanke tomorrow may disappoint stock investors betting on a commitment to step up stimulus.

Gasoline costs are 33 percent higher, consumer inflation is twice as fast and inflation expectations are above levels since Bernanke signaled more easing a year ago at the annual Fed symposium. While the U.S. expansion has slowed, the Chicago Fed’s index of 85 economic indicators improved in July for a third month on gains in production.

Policy makers, who said Aug. 9 they’ll use additional tools “as appropriate,” probably don’t expect a recession or rapid disinflation, making a signal of bond buying premature, said Roberto Perli, managing director at International Strategy & Investment Group in Washington. Instead, Bernanke will probably detail options for further stimulus and clarify how much the Fed’s reduction in its outlook this month stems from long-term obstacles to growth, said Keith Hembre, a former Fed researcher.

“Conditions are substantially different today” compared with last year, especially inflation, said Hembre, chief economist and investment strategist in Minneapolis at Nuveen Asset Management, which oversees about $212 billion. “First and foremost, that would be the reason I think that any sort of major asset purchase announcement is unlikely,” he said.

Fed Talk

The Fed chairman indicated at last year’s Jackson Hole conference that the central bank “will do all that it can” to ensure a continuation of the economic recovery and that more securities purchases might be warranted if growth slows. Two months later, the Fed announced a $600 billion second round of U.S. debt purchases to support the recovery, a program that ended in June.

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt known as the break-even rate, has risen to 2.07 percentage points from this year’s low of 1.96 percentage points set Aug. 18. The five-year average is 2.06 percentage points.

French, Italian and Spanish stock-market regulators extended temporary bans on short selling introduced this month in a bid to stem market volatility. Spain and Italy extended their bans through Sept. 30, regulators in both countries said in a statement. France’s Autorite des Marches Financiers said its ban could last as long as Nov. 11. The regulators all said they might lift the bans on short selling of financial stocks when the market stabilizes.

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