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Treasury Five-Year Yield Falls to Record as GDP Misses Forecast

Treasury five-year note yields fell to a third consecutive record low after slower-than-forecast U.S. growth added to speculation the Federal Reserve will expand asset purchases to spur economic growth.

Ten-year notes rose as stockpile rebuilding accounted for 1.9 percentage points of the 2.8 percent economic expansion, sparking concern growth may be weaker than expected in the first three-months of this year. New York Fed President William C. Dudley said the economy will probably slow this year while confronting risks “skewed to the downside.”

“The GDP print came in below expectations, which somewhat affirmed the message delivered by the Fed during the week,” said Russ Certo, managing director of rates trading at Gleacher & Co. in New York. “The Fed set the tone for not just this week, but for the quarter or the year.”

The five-year note yield decreased two basis points, or 0.02 percentage point, to 0.75 percent at 5 p.m. New York time after dipping below 0.74, according to Bloomberg Bond Trader prices. The 0.875 percent securities maturing in January 2017 rose 3, or $0.94 per $1,000 face amount, to 100 19¾.

Yields on benchmark 10-year notes fell four basis points to 1.89 percent after climbing to as high as 1.97 percent.

Treasuries have lost 0.2 percent this year through yesterday, compared with a 0.3 percent decline at the same point last year, according to Bank of America Merrill Lynch indexes.

Europe’s sovereign-debt crisis and the threat of a U.S. economic slowdown combined to give Treasuries a 9.8 percent return last year, the most since 2008.

‘Slightly Less’

The rise in gross domestic product, the value of all goods and services produced, follows a 1.8 percent gain in the prior quarter, Commerce Department figures showed today in Washington. The median forecast of 79 economists surveyed by Bloomberg News called for a 3 percent increase. Excluding a jump in inventories, growth was 0.8 percent.

“It’s slightly less than what the market was expecting, but the number kind of fits the description that the Fed’s been giving us,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “I don’t think it’s as bad as market thinks.”

Dudley said today in remarks in New York that the main risk to growth is “uncertainty as to how events in Europe will unfold.” Also, “more contractionary” fiscal policies and the “depressed housing market” are likely to impede economic expansion, he said.

Additional Stimulus

The policy-setting Federal Open Market Committee this week voted to extend its pledge to keep interest rates low until at least late 2014, compared with a previous date of mid-2013. Chairman Ben S. Bernanke said on Jan. 25 that the Fed is weighing additional stimulus to bring down the 8.5 percent unemployment rate, including another round of bond buying. The announcements sparked a two-day rally in Treasuries.

The difference between yields on five-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, widened today to 1.80 percentage points, up from 1.55 at the end of last year.

Demand for inflation protection has led to a 1.2 percent gain in TIPS this year, following a 14 percent return in 2011, according to Bank of America Merrill Lynch indexes.

Fed Sells

The Fed sold $8.74 billion of securities due from March 2014 to January 2015 today as part of a plan to replace $400 billion of shorter-maturity Treasuries in its holdings with longer-term debt to cap borrowing costs. The central purchased $2.3 trillion of debt in two rounds of quantitative easing that ended in June.

Longer-term Treasuries have lagged behind shorter maturities in this week’s rally, increasing the difference between five- and 10-year yields to 1.21 percentage points yesterday, the widest in almost three months. The spread was 1.15 percentage points today.

“Most people tend to listen to the Fed, and the Fed certainly doesn’t seem too concerned with inflation,”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, said of the growth report. “In fact, it might even be too low.”

Shorter-term Treasuries tend to track what the central bank does with its target for overnight lending, while longer maturities are more influenced by the inflation outlook.

Yields on 30-year bonds fell three basis points to 3.06 percent.

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