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Treasury 10-Year Notes Fluctuate Before Sale, Fed Projection

Jan. 25 (Bloomberg) -- Treasury longer-term securities fluctuated before the U.S. sells $35 billion in five-year notes as Federal Reserve policy makers prepare to give forecasts for borrowing costs for the first time.

Yields on benchmark 10-year notes were at almost a six-week high as most economists in a Bloomberg News survey said they didn’t expect the Federal Open Market Committee to announce more asset purchases today. The U.S. sold $35 billion in two-year notes yesterday and will sell $29 billion of seven-year debt tomorrow.

“The five-year auction could be a little more volatile than normal because of the FOMC,” said Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc., one of 21 primary dealers obligated to bid in U.S. debt auctions. “The FOMC meeting is different and it’s throwing a curve at the marketplace. People are not sure how to interpret the new information.”

Yields on 10-year notes were little changed at 2.06 percent at 10:58 a.m. New York time, according to Bloomberg Bond Trader prices. The 2 percent securities maturing in November 2021 traded at 99 15/32. Yields on 30-year bonds rose one basis point, or 0.01 percentage point, to 3.15 percent.

The FOMC plans to release a policy statement at 12:30 p.m. in Washington after a two-day meeting. At 2 p.m., the central bank for the first time will release forecasts from FOMC participants for the main interest rate, and Chairman Ben S. Bernanke will hold a press conference at 2:15 p.m.

Fed Buying

Fed policy makers will probably buy mortgage bonds if the economy warrants more easing, with purchases of all debt totaling $500 billion, according to economists in a Bloomberg News survey.

Forty-six percent of economists say a new round of bond buying would consist entirely of mortgage-backed securities, while 35 percent predict it would also include Treasuries. None of the 56 economists in the survey expect the central bank would purchase only Treasuries.

The number of Americans signing contracts to buy previously owned homes fell in December from a 19-month high. The index of pending home sales decreased 3.5 percent, more than projected, after a 7.3 percent gain the prior month, figures from the National Association of Realtors showed today in Washington. Economists forecast a 1 percent drop, according to the median estimate in a Bloomberg News survey.

Bernanke’s ‘Blunting’

Bernanke said in a Jan. 4 letter to Congress that housing is “blunting” the impact of a target rate of virtually zero and impeding economic growth. By purchasing more mortgage bonds, Bernanke would aim to cut the cost of home loans, spurring refinancing and sales of residential properties. Most economists said they don’t expect the Fed to announce more asset purchases today.

“We expect the rate guidance in the policy statement to move the timetable for current accommodation well beyond mid-2013 and into 2014,” Peter Goves and Nishay Patel, fixed-income strategists at Citigroup Inc. in London, wrote in an e-mailed report today.

The U.S. will sell five-year securities in the second of three note auctions this week. The debt being sold today yielded 0.92 percent in pre-auction trading, versus the record low of 0.88 percent at the prior sale Dec. 20.

Investors bid for 2.86 times the amount offered in December, matching the average for the past 10 monthly auctions.

Indirect bidders, the category of investors that includes foreign central banks, bought 50.6 percent of the notes, the most in 16 months.

Bid-to-Cover

Treasury five-year notes have lost 0.2 percent this year as of yesterday, compared with a 0.8 percent decline for the broader market, according to indexes compiled by Bank of America Merrill Lynch.

Yesterday, the U.S. two-year auction’s bid-to-cover ratio, which gauges demand by comparing orders with the amount of debt offered, was 3.75, compared with an average of 3.43 for the previous 10 sales.

Demand for Treasuries has remained strong and an increase in yields has been limited amid the European sovereign-debt crisis.

The European Central Bank remains firmly opposed to any restructuring of its Greek bond holdings as the debt was acquired for monetary policy purposes, according to two people familiar with the Governing Council’s stance.

While the ECB faces pressure to join private-sector investors in taking losses on Greek debt, the central bank sees this as potentially damaging to confidence in the institution if it were to take part, said the people, who declined to be identified because the matter is confidential.

‘Greece Problem’

“In the short term, you can buy Treasuries because the Greece problem isn’t solved yet,” said Hiroki Shimazu, an economist in Tokyo at SMBC Nikko Securities Inc., a unit of Japan’s third-largest publicly traded bank by assets. “Longer-term, I don’t recommend buying. The U.S. economy, even the housing market, is stronger than expected.”

The three-month cross-currency basis swap, the rate banks pay to convert euro interest payments into dollars, was 74 basis points less than the euro interbank offered rate, according to data compiled by Bloomberg.

The measure has tightened from minus 162.5 basis points on Nov. 30, with a negative figure showing that European banks pay a premium to swap into dollar-based funding.

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Keith Jenkins in London at kjenkins3@bloomberg.net

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

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