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Treasuries Pare Gains as Fed Purchases Speculation Eases

Treasuries notes pared gains as speculation eases that the Federal Reserve will hint at additional asset purchases and an auction of $32 billion of three-year debt attracted lower-than-forecast demand.

The three-year notes drew a yield of 0.456 percent, compared with the average forecast of 0.450 percent in a Bloomberg News survey of six of the Fed’s 21 primary dealers. The Treasury will sell $21 billion in 10-year notes tomorrow, when the Federal Open Market Committee meets. The U.S. will sell $13 billion of bonds the next day.

“The auctions will go fine,” said Dan Mulholland, a Treasury trader in New York at RBC Capital Markets LLC, one of the 21 primary dealers required to bid at government debt auctions. “It’s just finding a level where people care: 2.05 percent to 2.10 percent on the 10-year. We’re not expecting a lot out of the Fed meeting, just the status quo.”

Yields on benchmark 10-year notes were little changed at 2.04 percent at 4:59 p.m. New York time, according to Bloomberg Bond Trader prices. The yield had dropped earlier to 1.99 percent. The price of the 2 percent securities maturing in February 2022 fell 1/32, or 31 cents per $1,000 face value to 99 22/32.

The current three-year note yields were little changed at 0.45 percent. Yields on 30-year bonds decreased one basis point to 3.17 percent.

At today’s three-year note auction, indirect bidders, an investor class that includes foreign central banks, purchased 34.6 percent of the notes, compared with an average of 36.8 percent for the past 10 sales.

Direct Bidders

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 8.9 percent of the notes at the sale, compared with an average of 11.1 percent for the past 10 auctions.

“There were a couple of things working against the auction. You had high dealer long positions in the sector, and foreigners have been backing out of threes lately,” said Scott Sherman, an interest-rate strategist in New York at Credit Suisse Group AG, a primary dealer. “Not a bad result, especially with the Fed selling so many threes.”

Thirty year-bonds led today’s gains as the central bank purchased $1.969 billion of Treasuries maturing from February 2036 through February 2042 today under its program to replace $400 billion of short-term debt in its portfolio with longer-term Treasuries to reduce borrowing costs and counter risks of a recession.

Focus on Twist

The so-called Operation Twist may lower the 10-year note yield by about 85 basis points, compared with a reduction of 164 basis points under the two rounds of debt purchases known as quantitative easing, the Basel, Switzerland-based Bank for International Settlements said in a report released yesterday.

“People are going to be focused on the Twist,” said William Larkin, a fixed-income money manager who helps oversee $500 million at Cabot Money Management Inc. in Salem, Massachusetts. “The 10-year is glued at 2 percent.”

Fed Chairman Ben S. Bernanke said on Jan. 25 after the Federal Open Market Committee’s last gathering that policy makers were considering additional asset purchases to boost growth. The central bank also extended a pledge to keep the benchmark interest rate at almost zero through at least late 2014. The Fed bought $2.3 trillion of securities under the two rounds of QE from December 2008 to June 2011.

Commercial lenders purchased $78.2 billion of Treasuries and securities of agencies in January and February, compared with $62.6 billion in all of 2011, bringing their holdings to $1.78 trillion, Fed data show. Deposits exceeded loans by a record $1.63 trillion last month, up from $1.17 trillion in January 2011, providing scope to buy more bonds.

Greek Concern

U.S. debt securities rose earlier on concern Greece will need further international assistance after its debt swap.

Greece faces “significant challenges” in the coming years to achieve fiscal targets required to satisfy conditions for international support and may not regain market access when its second bailout expires, Moody’s Investors Service said in its Weekly Credit Outlook.

Treasury 10-year yields will advance to 2.52 percent by Dec. 31, according to the average forecast of economists in a Bloomberg News survey, with the most recent projections given the heaviest weightings. The yields have been in a range of 1.79 percent to 2.09 percent this year.

Bank of America Merrill Lynch’s MOVE index, which measures price swings based on options, dropped to 73.2 on March 9, near the 70.2 basis points reached Feb. 2 that was the lowest since July 2007. The measure has tumbled from 117.8 on Aug. 8 as central banks stepped up efforts to ease tension in financial markets.

Treasury market volume rose March 9 to the highest since March 1. About $265 billion of Treasuries changed hands through ICAP Plc, the world’s largest interdealer broker, compared with the one-year average of $276 billion.

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