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Treasuries 10-Year Yield Close to Low Amid Europe Talks

Treasury 10-year note yields traded at almost record lows as German and French finance ministers met to discuss strategy amid the Greek electoral impasse that has worsened the European debt crisis.

U.S. 30-year bond yields closed near the lowest since December as the Federal Reserve purchased $1.8 billion of longer-term Treasuries. U.S. debt fell earlier on speculation record-low yields may limit demand as the government auctions $99 billion of coupon-bearing debt this week. The difference between the yields on the 10-year and 30-year securities narrowed to the least since January on reduced concern inflation will erode the value of fixed-income assets.

“There continues to be demand for the long end,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “The market has been able to improve on the day. The persistent flight to quality demand will support this week’s auctions.”

The 10-year yield rose two basis points, or 0.02 percentage point, to 1.74 percent at 4:59 p.m. in New York, Bloomberg Bond Trader prices show. The 1.75 percent note due in May 2022 fell 5/32, or $1.56 per $1,000 face amount, to 100 2/32. The yield added as much as five basis points earlier and reached a record 1.67 percent on Sept. 23.

The yield on the seven-year note fell one basis point to 1.17 percent. The yield declined to an all-time low of 1.135 percent on May 18.

Yield Levels

The 30-year bond yield was little changed at 2.81 percent. The gap between 10- and 30- year yields narrowed to close at 107 basis points, the least since Jan. 19. It widened to a 2012 high of 120 basis points on May 1.

Treasuries returned 1.5 percent in the month ending May 18, Bank of America Merrill Lynch indexes show, reflecting demand for safer assets. Investors tracking the MSCI All-Country World Index of stocks lost 8.2 percent in the same period, including reinvested dividends.

Yields on U.S. 10-year bonds may drop another 10 basis points, or rise another 30 basis points, Pacific Investment Management Co.’s Mohamed El-Erian in an interview on Bloomberg Radio’s “Bloomberg Surveillance” with Tom Keene and Ken Prewitt.

The 10-year yield is being anchored by the likelihood the Fed will remain accommodative with rates and forward communication, and “we may well get QE3,” El-Erian, he chief executive officer of the world’s largest manager of bond funds said. Yields will also remain low because of “sluggish growth” in the U.S. and a flight to quality from Europe’s debt crisis, he said.

Yield Range

“Until one of these three things change, people are going to be surprised by how low 10-year interest rates are,” El Erian said.

The U.S. will start this week’s sales with $35 billion of two-year notes tomorrow, followed by the same amount of five-year debt on May 23 and $29 billion of seven-year securities on May 24.

Valuation measures show Treasuries are close to the most expensive levels ever. The term premium, a model created by economists at the Fed, touched negative 0.82 percent, approaching the most expensive closing level ever of negative 0.83 percent reached May 17. A negative reading indicates investors are willing to accept yields below what’s considered fair value.

Volatility on May 18 was unchanged at 70.6 basis points, according to Bank of America Merrill Lynch’s MOVE index, which measures Treasury price swings based on options. The gauge is below the one-year average of 87.94 basis points.

Fed Fight

“There’s no real conviction in the market,” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities Inc. in New York. “There are no shorts left. The Fed is a big buyer so you can’t fight the Fed.” A short is a bet the price of a security will drop.

Ten-year yields will increase to 2.48 percent by year-end, according to the average forecast in a Bloomberg survey of financial companies. It declined to a record 1.67 percent on Sept. 23.

Should the yield drop to a new all-time low, it is likely to meet resistance at around 1.54 percent, which would provide a floor, David Sneddon, head of technical analysis at Credit Suisse Group AG in London, wrote today in a note to clients. Resistance refers to an area where sell orders may be clustered.

Bond traders are cutting expectations for U.S. inflation by the most since December. If their bets are accurate, Federal Reserve Chairman Ben S. Bernanke may have the scope for additional stimulus.

Operation Twist

With six weeks left before the end of the Fed’s $400 billion swap of short-term debt for longer-term securities in a program known as Operation Twist, assets that protect against rising consumer prices and forwards measuring the outlook for inflation show diminished concerns. Traders are pricing in a 55 percent chance that the central bank will begin new efforts to spur economic growth, Bank of America Corp. says.

Speculation has risen that the central bank may need to add to the $12.8 trillion already spent to avert a second recession in three years. Jobs are growing more slowly than forecast and Bernanke said April 25 that the Fed remains “prepared to do more as needed.” For first time since it announced Operation Twist in September, the Fed’s preferred gauge of measuring traders’ inflation expectations is poised to fall for a second straight month.

“It’s not only a weak economy, but as inflation comes down, it could be another reason for the Fed to implement some more stimulus,” said Gary Pollack, head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York, which manages $12 billion, in a May 14 interview.

Fed Buys

The Fed purchased Treasuries maturing from February 2036 to November 2041 today as part of its $400 billion debt-swap program, according to the Fed Bank of New York’s website.

The difference in yields between 10-year notes and Treasury Inflation Protected Securities, which represents expectations for the rate of inflation over the life of the securities, shrank to 2.04 percentage points on May 17, the narrowest since Jan. 23. It was at 2.17 percent today.

Germany’s Finance Minister Wolfgang Schaeuble discussed the 17-nation currency at a meeting with his newly installed French counterpart, Pierre Moscovici, in Berlin as European Union leaders prepare for a summit May 23. Greece’s efforts to combat a recession are raising concern it will abandon the euro.

“We will engage all ideas constructively and find solutions in order to strengthen sustainable growth,” Schaeuble said after meeting Moscovici for the first time today in Berlin. Moscovici, who became finance minister last week, said President Francois Hollande wants “everything on the table,” including joint euro-area bonds, at a meeting of European leaders two days from now.

German 10-year bunds, Europe’s benchmark government securities, were little changed, with the yield at 1.43 percent.

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