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U.S. Five-Year Yields at Almost Six-Week Low Before Italy Vote

Treasury five-year note yields were at almost the lowest level since September as Italy’s Prime Minister Silvio Berlusconi faced calls to step down on concern the nation will struggle to pay its debts.

Five-year note yields erased their drop as U.S. stock-index futures increased. Italy’s 10-year yield touched a euro-era high of 6.74 percent on signs the government is unraveling. U.S. three-year note yields were little changed as the government prepared to auction $32 billion of the securities today.

“All eyes are on Europe,” said David Schnautz, a fixed-income strategist in London at Commerzbank AG, Germany’s second-biggest lender. “We’re focusing on Italy, and the debt market there is very much the safe-haven driver. The ebbs and flows there call the shots, even for the Treasury market.”

Yields on five-year notes were little changed at 0.91 percent at 7:42 a.m. New York time, according to Bloomberg Bond Trader prices. The 1 percent securities maturing in October 2016 decreased 1/32, or 31 cents per $1,000 face amount, to 100 14/32. Yields fell earlier today to 0.86 percent, compared with 0.84 percent yesterday, the lowest since Sept. 23.

Benchmark 10-year note yields were little changed at 2.04 percent after falling as low as 2 percent. Three-year note yields were at 0.39 percent.

The extra yield investors demand to hold Italy’s 10-year bonds instead of similar-maturity Treasuries climbed to 4.59 percentage points, the fourth-highest among bond markets for euro-region nations, after Greece, Portugal and Ireland.

‘Buying Catalyst’

“Europe’s debt problem is a positive buying catalyst for Treasuries,” said Tomohisa Fujiki, a rates strategist in Tokyo at a unit of BNP Paribas SA. “Italy’s 10-year yields over 6 percent may be unsustainable for continuous refunding.”

Italy’s Chamber of Deputies will vote today in Rome on a routine report on last year’s budget plan that will reveal whether Berlusconi retains a majority in the 630-seat house. It’s the first test since three party members defected and six others publicly called on the premier to quit. Should Berlusconi fail to muster 316 votes, he would probably face a confidence vote that will decide his fate.

The Federal Reserve will buy as much as $5 billion of debt today due from November 2019 to August 2021 under its program to lower borrowing costs. The Fed plans to buy $400 billion in longer-term maturities and sell shorter maturities to support the economy by the end of June 2012 under the program known as Operation Twist.

Fisher’s View

Dallas Fed President Richard Fisher said he would oppose any additional easing after backing the Fed’s Nov. 2 pledge to press efforts to reduce borrowing costs, Reuters reported yesterday.

The Reuters/University of Michigan preliminary index of U.S. consumer sentiment rose for a third month in November, according to the median forecast of 62 economists in a Bloomberg News survey before the Nov. 11 report.

Three-year Treasury notes to be sold today yielded 0.41 percent in pre-auction trading, dropping from the 0.54 percent at the prior sale on Oct. 11.

Investors bid for 3.30 times the amount for sale at the October sale, more than the average of 3.21 for the past 10 auctions. Indirect bidders, the category of investors that includes foreign central banks, bought 37.8 percent of the notes compared with the 10-sale average of 35.9 percent.

Direct bidders, non-primary dealers buying for their own accounts, purchased 7.8 percent of the notes, the least since December 2009.

“These auctions should see decent demand,” Commerzbank’s Schnautz said. “Many investors look for a safe place to keep their money invested over the turn of the year.”

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