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Treasuries Rise on $35 Billion 2-Year Note Auction

Treasuries rose as the highest pre-auction yields since July spurred stronger-than-average demand at a government sale of $35 billion in two-year securities and reports showed declines in consumer confidence and home prices.

The offering drew a yield of 0.340 percent, compared with a forecast of 0.349 percent in a Bloomberg News survey of seven of the Federal Reserve’s 21 primary dealers. The U.S. will sell $64 billion in five- and seven-year notes tomorrow and the next day. Fed Chairman Ben S. Bernanke said today policy makers don’t rule out any further options to boost economic growth.

“The auction went very well, and should extend to the rest of the week’s auctions given the sentiment,” said Suvrat Prakash, an interest-rate strategist in New York at BNP Paribas Securities SA, which as a primary dealer is obliged to bid at Treasury offerings. “There is less risk appetite, which is beneficial for bonds. Going into quarter-end and month-end, there is more reluctance to take on risk position because people want to play it safe.”

The yield on the 10-year note dropped six basis points, or 0.06 percentage point, to 2.18 percent at 5:37 p.m. New York time, according to Bloomberg Bond Trader prices. It has risen 21 basis points in March, headed for the biggest monthly gain since December 2010. The price of the 2 percent securities maturing in February 2022 advanced 18/32, or $5.63 per $1,000 face amount, to 98 3/8.

Current two-year note yields dropped two basis points to 0.32 percent, a two-week low. Two-year notes being sold today yielded 0.345 percent in pre-auction trading.

Below Moving Average

Benchmark 10-year yields fell back below their 200-day moving average today, indicating this month’s slump in bond prices may be coming to a close. The yields dropped as low as 2.1729 percent in New York, compared with today’s 200-day moving average of 2.1805 percent, according to prices compiled by Bloomberg. The yields rose above the average on March 14 for the first time since July.

“This idea that the bond rally is dead or high yields await investors imminently is incorrect,” Dan Greenhaus, chief global strategist at the broker-dealer BTIG LLC in New York, said in a telephone interview. “As today shows, not everybody believes that the bond bear market began yesterday.”

Treasuries fell yesterday as Fed Chairman Ben S. Bernanke buoyed investor risk appetite by saying accommodative policy is still needed to reduce joblessness.

No Tightening

“They’re going to continue to be very accommodative until unemployment really comes down, which has opened the eyes of investors that there’s not going to be any tightening from this Fed,” Brian Edmonds, head of interest rates at the primary dealer Cantor Fitzgerald LP in New York, said in a telephone interview. “That’s the correction that we’ve seen.”

Bernanke said in a broadcast interview scheduled to air later today that economic recovery in the U.S. isn’t assured.

“It’s far too early to declare victory,” Bernanke said, according to a transcript of an interview with ABC News anchor Diane Sawyer provided by the network. “The recent news has been good. But I think we need to be cautious and make sure this is sustainable.”

Another round of debt purchases remains “on the table,” he said. “We don’t take any options off the table,” he said.

The 10-year break-even rate, a gauge of the outlook for consumer prices over the next decade derived from the yield difference between 10-year notes and Treasury Inflation Protected Securities, decreased for a fifth day, the longest since August. It touched 2.32 percentage points after reaching a seven-month high of 2.45 percentage points on March 20. The average over the past year is 2.19.

Volume Surges

The volume of Treasury trades handled through ICAP Plc, the biggest broker between banks, climbed for the first time in four days, reaching about $286 billion today. It fell yesterday to about $160 billion, the lowest level since Jan. 9.

At today’s two-year note auction, the bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.69, versus an average of 3.53 for the past 10 sales.

Indirect bidders, an investor class that includes foreign central banks, purchased 34.3 percent of the notes, compared with an average of 32.1 percent for the past 10 sales. Direct bidders, non-primary dealer investors that place their bids directly with the Treasury, purchased 21.4 percent of the notes, the most since April 2010, versus an average of 13.3 percent at the past 10 sales.

The Treasury will sell $35 billion of five-year notes tomorrow and $29 billion of seven-year debt on March 29.

Dudley on Europe

Turmoil in global financial markets continues “to pose significant downside risks to the economic outlook,” Fed Bank of New York President William Dudley said. While Europe has made progress tackling its debt crisis, if economic conditions in the region were to “weaken significantly,” demand for U.S. exports would drop, he said today in testimony to a House Financial Services subcommittee.

Treasuries have lost 1.4 percent in 2012, their biggest quarterly decline since the last three months of 2010, according to indexes compiled by Bank of America Merrill Lynch.

Pacific Investment Management Co.’s Bill Gross said today continued credit expansion by central banks will produce accelerating global inflation and slower growth.

Gross, the founder of Pimco, said in his monthly investment outlook on Pimco’s website that the world’s bigger manager of bond funds favors shorter-duration and inflation-protected debt as well as dividend-paying equities with a preference for developing markets.

Thirty-year bonds rose as the Fed bought $1.97 billion of Treasuries today due from February 2036 to May 2041 as part of a plan to cap borrowing costs by replacing $400 billion of shorter maturities in its holdings with longer-term debt.

Long-Bond Yields

Long-bond yields fell four basis points to 3.30 percent and touched 3.28 percent, the lowest level since March 14.

Treasuries rose earlier as the Standard & Poor’s/Case-Shiller index of property values in 20 cities fell 3.8 percent in January from a year earlier, after decreasing 4.1 percent in December. Prices were little changed from the prior month, the best performance since July.

The Conference Board’s confidence index dropped to 70.2 this month from a revised 71.6 reading in February, figures from the New York-based private research group showed today.

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