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Treasury Yields Close to Lows as Bernanke Refrains From Stimulus

Treasury yields were close to record lows after Federal Reserve Chairman Ben S. Bernanke refrained from discussing specific steps for further monetary stimulus, sustaining the refuge appeal of the world’s safest assets.

Bernanke told told Congress that progress in reducing unemployment is likely to be “frustratingly slow” and repeated the Fed is ready to take further action to boost the recovery. Yields on five-year notes fell to a record yesterday after the U.S. reported an unexpected decline in retail sales for a third straight month.

“The economy has failed to sustain the positive momentum we had coming in to the second quarter,” said Carl Lantz, head of interest-rate strategy in New York at Credit Suisse AG, one of 21 primary dealers that trade with the Fed. “Markets are resigned to this very slow and difficult slog that isn’t bringing unemployment down. And the prospect of Fed tightening seems remote, which leaves 1.5 percent yields looking more and more attractive.”

Five-year note yields were little changed at 0.60 percent at 11:38 a.m. New York time, after dropping to a record 0.577 percent yesterday. The benchmark 10-year note yield gained two basis points, or 0.02 percentage point, to 1.49 percent.

Highly rated government bonds such as Treasures have rallied as reports showed global growth is slowing, raising the prospect of more central-bank stimulus. Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said the economy is “approaching recession” in a Twitter post yesterday.

Consumer Prices

Austrian two-year government note yields fell below zero for the first time, while French yields dropped to the least on record as investors sought the safest assets on concern economic growth is slowing globally.

U.S. government debt fell earlier after the cost of living in the U.S. was little changed in June, a Labor Department report showed in Washington, a sign inflation may stay subdued as Fed officials have predicted. That followed a 0.3 percent drop in the consumer-price index in May. The measure matched the median forecast of economists in a Bloomberg News survey.

The Fed under Bernanke bought $2.3 trillion of Treasury and mortgage-related debt from 2008 to 2011 to stimulate the economy. The central bank decided in June to extend a policy known as Operation Twist, where it sells short-term securities and uses the proceeds to buy longer-term debt, to $667 billion from $400 billion. The Fed said it plans to keep borrowing costs near record lows through at least late 2014.

‘Minimal Amount’

“There’s a minimal amount the Fed can do right here, right now,” Alan De Rose, head of Treasury trading at Oppenheimer & Co. Inc. in New York. “The problem lies in other areas, beyond the Fed’s control. There’s really only so much they can do from here. They have to use what little bullets they have in a very selective basis.”

The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt known as the break-even rate, was 2.08 percentage points. The 10-year average is 2.15 percentage points.

The five-year, five-year forward break-even rate, a measure of inflation expectations that the Fed uses to guide monetary policy, was 2.4 percentage points as of July 12. The figure has dropped from 2012’s high of 2.78 percentage points set in March.

While the two gauges show expectations for price increases are waning, yields indicate there is still demand for the inflation insurance that TIPS provide.

‘Fall Further’

Yields on 10-year TIPS fell to a record low of negative 0.68 percent yesterday. The U.S. is scheduled to sell $15 billion of the securities July 19.

Goldman Sachs analysts led by Jan Hatzius cut their estimate for second-quarter gross domestic product growth to 1.1 percent from 1.3 percent yesterday. Fed Bank of Kansas City President Esther George said yesterday the U.S. economy probably won’t grow much faster than 2 percent in 2012.

The U.S. is “approaching recession when measured by employment, retail sales, investment, and corporate profits,” Gross, who runs Pimco’s Total Return Fund, the world’s largest mutual fund, wrote on Twitter yesterday.

China, the largest foreign holder of Treasuries, increased its holdings of the debt for a second month in May amid gathering signs the U.S. economic recovery was loosing momentum, government data released today show.

China, Japan

China boosted its holdings 0.4 percent or $5.2 billion in May. The data showed China held $1.1644 trillion of Treasuries in April, an increase from the $1.1455 trillion reported for the period on May 15. For the year, China’s holdings have risen 1.5 percent.

Japan’s position in U.S. government debt rose by $15.4 billion, or 1.4 percent to $1.1052 trillion, Treasury data show. The country is the second largest foreign lender to the U.S.

Total foreign holdings of Treasuries rose for a fifth month, climbing $54.2 billion, or 1 percent to $5.264 trillion. Overseas investors held 50.2 percent of the Treasury’s outstanding public debt in May, the data show.

“Speculative investors have given up on trying to bet against the trend in rates,” said Credit Suisse’s Lantz. “People have to own Treasuries, and the yield can go even lower if this atmosphere persists.”

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