Treasuries Gain as 7-Year Auction Draws Record Low Yield

Treasuries gained for the first time in three days as the Federal Reserve’s pledge to keep borrowing rates low through 2014 pushed the yield to a record low at today’s auction of $29 billion in seven-year notes.

The 10-year note yield fell toward the lowest level in two months as higher-than-forecast weekly jobless claims added to speculation the Fed is far from pulling back on monetary stimulus. Fed Chairman Ben S. Bernanke said yesterday he is prepared to do more if needed. Yields fell earlier on concern the European debt crisis may widen.

“There’s continued angst about Europe,” said Ira Jersey, an interest-rate strategist at Credit Suisse Group AG in New York, one of 21 primary dealers that are required to bid at the auctions. “If you do wind up getting more of a global slowdown, that’s going to impact the U.S. You have to imagine the Fed might help things by doing one of the few easing policies that they can do.”

The yield on the current seven-year note fell three basis point, or 0.03 percentage point, to 1.33 percent at 3:47 p.m. in New York, according to Bloomberg Bond Trader Prices. The benchmark 10-year yield traded at 1.95 percent and dropped as low as 1.93 percent after reaching 1.91 percent on April 23, the lowest since Feb. 28.

The seven-year notes sold today yielded 1.347 percent, versus 1.59 percent at the previous offering on March 29. The previous low was 1.359 percent in January.

‘Low-Yield Levels’

Indirect bidders, an investor class that includes foreign central banks, purchased 38.2 percent of the seven-year notes, compared with an average of 39.7 percent for the past 10 sales.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 17.6 percent of the notes, compared with an average of 13.1 percent at the last 10 auctions.

Treasuries pared gains as yields climbed after the record low level at the auction as stocks rose.

“It’s hard to push the market through these levels,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “These are very, very obviously aggressive low-yield levels. It takes a continuation of bad news” to fuel the rally.

Treasuries maturing in seven years have returned 0.7 percent this year after returning 14 percent in 2011, according to Bank of America Merrill Lynch indexes. The overall Treasury market has fallen 0.05 percent this year after gaining 9.8 percent in 2011.

Third of Three

Today’s offering is the third of three U.S. note auctions this week totaling $99 billion. The Treasury sold $35 billion of five-year debt yesterday at a yield of 0.887 percent and $35 billion of two-year securities on April 24 at 0.27 percent.

Jobless claims fell by 1,000 to 388,000 in the week ended April 21 from a revised 389,000 the prior period that was higher than initially estimated, Labor Department figures showed today in Washington. The median forecast of 48 economists surveyed by Bloomberg News called for a drop to 375,000.

The Federal Open Market Committee yesterday said “labor market conditions have improved in recent months; the unemployment rate has declined but remains elevated.”

“Bernanke said it quite plainly: he’s prepared to do more, and it will depend on the trajectory of unemployment,” said Christopher Sullivan, who oversees $1.9 billion as chief investment officer at United Nations Federal Credit Union in New York. “They’re obligated to do more if the labor market recedes from here.”

Fed Expectations

The 10-year yield has fallen from an intraday high of 2.04 percent reached yesterday after the Fed released the revised economic forecasts showing their consensus expectation is for the unemployment rate to fall at a faster rate than seen in January.

The Fed released the expectations of the five Fed board members and 12 district bank presidents after the FOMC yesterday said it expects “economic growth to remain moderate over coming quarters and then to pick up gradually.” The previous statement on March 13 only said the committee foresaw “moderate” growth.

The 10-year yield fell below 2 percent as Bernanke’s announced during his press conference that he is “prepared to do more as needed,” and it hasn’t climbed above since.

“People are pretty bearish, and price action certainly trades like there are shorts that are under pressure,” said John Briggs, a U.S. government-bond strategist in Stamford, Connecticut at Royal Bank of Scotland Group Plc unit RBS Securities Inc., a primary dealer. “The market continues to over-analyze every little movement, every little blip. But listen to the chairman, and in that case it’s still lower for longer.”

‘Up Overnight’

U.S. gross domestic product expanded at a 2.5 percent annual rate in the first quarter after rising 3 percent in the previous three months, according to the median forecast of economists surveyed by Bloomberg News before the Commerce Department report tomorrow.

Italy’s Treasury sold six-month bills at a yield of 1.772 percent today, up from 1.119 percent at the previous auction on March 28. In Spain, where the country’s recession is undermining efforts to cut the budget deficit, bond yields remained at almost 6 percent amid concern bank losses will force the government to bail out the financial system.

“We were up overnight on some more worries on Europe,” said Mitsubishi UFJ’s Roth.

Fed’s Buying

The Fed bought $2.3 trillion of bonds in two rounds of so-called quantitative easing from December 2008 to June 2011.

The central bank bought $1.833 billion of Treasuries due from February 2036 to February 2042 today as part of its program to replace $400 billion of short-term debt in its portfolio with longer-term maturities in an effort to reduce borrowing costs further and counter rising risks of a recession.

The difference between 10- and 30-year yields was 1.18 percentage points, heading for the widest closing level since Feb. 7.

The 30-year yield dropped one basis point to 3.13 percent. The so-called long-bond’s yield is rebounding from 3.06 percent on April 23, the lowest since Feb. 29, according to data compiled by Bloomberg.

A break above the 100-day moving average at 3.12 percent, may be followed be an increase to the 200-day moving average at 3.21 percent, the data show.

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