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Treasuries Fall Before U.S. Bond Sale Amid Stimulus Speculation

Treasuries fell before the U.S. auctions $13 billion of 30-year bonds at what may be a record low yield amid speculation the Federal Reserve may take further measures to spur economic growth.

U.S. government securities earlier pared losses after reports showing weekly claims for U.S. jobless benefits unexpectedly rose and inflation remained subdued. An auction of 10-year notes yesterday drew a record low yield as investors sought a refuge from Europe’s financial crisis.

“The street is more concerned about supply than the numbers for the data,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors. “It’s always tricky with the 30-year, but we’ll probably see good sponsorship.”

The 30-year yield increased two basis points, or 0.02 percentage point, to 2.73 percent at 12:19 p.m. New York time after falling one basis point earlier, according to Bloomberg Bond Trader prices.

The 10-year note yield climbed three basis points to 1.62 percent after touching 1.59 percent earlier.

As the Treasury prepares to auction long bonds, the Fed purchased $2.04 billion of Treasuries today due from February 2036 to February 2042 as part of its Operation Twist program. The central bank is replacing $400 billion of shorter-term securities in its holdings with longer-term bonds through this month to keep borrowing costs down.

Policy Function

“It’s not a situation where the Treasury is selling directly to the Fed, thereby printing dollars to fund government consumption, but rather a function of the Fed’s easy monetary policy as it manifests itself in buying to flatten the Treasury curve,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut.

The U.S. 30-year bonds being sold today yielded 2.74 percent in pre-auction trading, compared with 3.09 percent at the previous sale on May 10 and a record auction low of 2.925 percent in December.

Treasuries pared losses after data showed claims for jobless benefits in the U.S. unexpectedly climbed by 6,000 to 386,000 in the week ended June 9 from a revised 380,000 the prior week that was more than first estimated, Labor Department figures showed today in Washington. Economists projected claims would fall to 375,000, according to the median estimate in a Bloomberg News survey.

CPI Slides

The cost of living in the U.S. fell in May by the most in more than three years as fuel prices retreated, buttressing Fed projections that cheaper commodities will help reduce inflation. The consumer-price index declined 0.3 percent, more than forecast and the biggest drop since December 2008, after no change the prior month, the Labor Department reported today in Washington. Economists projected a 0.2 percent decrease.

“It’s going to help the case for the doves that want to build accommodation,” said Jacob Oubina, a senior U.S. economist at Royal Bank of Canada’s RBC Capital Markets unit in New York, one of 21 primary dealers that trade Treasuries with the Fed. “Headline CPI is decelerating at a faster pace than even we had anticipated.”

The difference in yields between 10-year notes and Treasury Inflation Protected Securities, a measure of traders’ expectations for inflation known as the break-even rate, touched 2.09 percentage points from this year’s high of 2.45 percentage points in March. It dropped to 2.01 percentage points on May 30, the lowest since Jan. 17. The gap has averaged 2.15 percentage points in the past decade.

Fed Measure

A measure of price-increase predictions used by the Fed to set policy, the five-year, five-year forward break-even rate, which gauges the average inflation rate between 2017 and 2022, was 2.52 percentage points on June 11, down from a 2012 high of 2.78 percentage points on March 19 and a five-year average of 2.8 percent.

Treasuries rose yesterday as Europe’s worsening debt crisis spurred investor demand for safety.

Moody’s Investors Service cut Spain’s credit rating yesterday by three steps to Baa3, citing the nation’s increased debt burden, weakening economy and limited access to capital markets. The yield on Spain’s 10-year note climbed to 6.998 percent, the highest ever. Greeks will vote again this weekend after a May election failed to produce a coalition government.

‘Significant Risks’

“The situation in Europe poses significant risks to the U.S. financial system and economy and must be monitored closely,” Fed Chairman Ben S. Bernanke told lawmakers on June 7. “As always, the Federal Reserve remains prepared to take action as needed to protect the U.S. financial system and economy in the event that financial stresses escalate.”

The Fed opens a two-day policy meeting on June 19.

The central bank bought $2.3 trillion of bonds from December 2008 to June 2011 in two rounds of a tactic called quantitative easing, seeking to cap borrowing costs and stimulate the economy.

The U.S. auctioned $21 billion of 10-year notes yesterday at a record-low yield of 1.622 percent. The bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 3.06, versus 2.9 at the previous auction on May 9.

Treasuries have returned 3.2 percent this quarter through yesterday, Bank of America Merrill Lynch indexes showed. The MSCI All Country World Index of stocks has lost 9.3 percent, including reinvested dividends.

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