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U.S. 30-Year Yields Reach Eight-Week High After $16 Billion Sale

Treasury 30-year bond yields fell from an eight-week high after a $16 billion auction of the securities drove prices to levels that attracted investors.

The long-bond yield was little changed after rising as high as 2.80 percent amid added evidence of employment gains. Jobless claims unexpectedly dropped by 6,000 to 361,000 in the week ended Aug. 4, Labor Department figures showed, eroding speculation the Federal Reserve may expand monetary stimulus to bolster the economy. Demand was less than average at today’s sale and fell to the lowest level in three years at yesterday’s 10-year note auction.

“We’ve had a huge concession,” said David Ader, head of U.S. government bond strategy at CRT Capital Group LLC in Stamford, Connecticut. “This weakness that we’ve seen was about setting up and just getting to a level that would generate some interest.”

The yield on the current 30-year bond was little changed at 2.76 percent in trading at 5 p.m. New York time, according to Bloomberg Bond Trader prices. The 3 percent security due in May 2042 declined 3/32, or 94 cents per $1,000 face amount, to 104 30/32.

The yield reached the highest level since June 13. It touched a record low 2.44 percent on July 26.

Auction Results

At today’s auction, the bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.41 versus, compared with the 2.68 average at the past 10 sales.

Indirect bidders, a class of investors that includes foreign central banks, bought 36.7 percent of the bonds, compared with percent at the July auction. The average for the past 10 offerings is 31.4 percent.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 7.7 percent, the lowest since January and compared with 20.1 percent of the securities at last month’s sale. The average at the past 10 auctions is 17.6 percent.

Primary dealers were awarded 55.6 percent of the offering compared with an average 51 percent at the last 10 sales and the most since April.

“The street bought them at a good price, the market held, and you had some buying come in afterward,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “Customers were a little leery of taking it down at that level because if it didn’t hold it would’ve gotten ugly.”

Market Results

Today’s sale completed this week’s note and bond auctions totaling $72 billion. The Treasury sold $24 billion of 10-year notes yesterday and $32 billion of three-year debt on Aug. 7. The 10-year securities drew a bid-to-cover ratio of 2.49, the lowest level since August 2009.

The difference in yields between Treasury two- and 10-year notes widened to as much as 1.44 percentage points, or 144 basis points, the most since May.

Investors should be wary of a steepening so-called yield curve in the U.S. Treasury market, according to Pacific Investment Management Co.’s Mohamed El-Erian.

While yields on government securities due in eight years and less are anchored by Fed monetary policy, there is “a lot more risk” in longer-maturity debt, El-Erian, the chief executive officer of the world’s largest manager of bond funds, said in a “Bloomberg Surveillance” radio interview with Tom Keene and Ken Prewitt.

Inflation Measure

The gap between 10-year yields on Treasury Inflation-Protected Securities and conventional U.S. government securities reached 2.34 percentage points, the most since April 4.

The Fed’s favored bond-market gauge of inflation expectations, the five-year, five-year measure forward breakeven rate, which shows how much traders anticipate consumer prices will rise during a period of five years starting in 2017, rose to 2.56 percent on Aug. 6, the highest since June 12.

U.S. government securities have returned 1.9 percent in 2012, versus 7.8 percent for an index of investment-grade and high-yield company debt, according to Bank of America Merrill Lynch data. Company bonds yield 2.67 percentage points more than Treasuries, with the difference narrowing from 3.48 percentage points at the end of last year, Bank of America Merrill Lynch data show.

The Fed purchased $1.6 billion of Treasury Inflation Protected Securities maturing from January 2025 to February 2042 today, according to the website of its New York branch. The purchases are part of the central bank’s effort to swap shorter-term Treasuries in its holdings with those due in six to 30 years to put downward pressure on long-term borrowing costs.

European Factor

European Central Bank officials are working on a plan to buy enough government bonds to ease the region’s financial turmoil, bank President Mario Draghi said after a policy meeting Aug. 2. Details will be released in coming weeks, he said. The ECB held its benchmark interest rate at a record low 0.75 percent.

The Fed said Aug. 1 after a meeting it “will provide additional accommodation as needed” to spur growth and employment. It refrained from action this month.

“Markets are still trying to price in” the evolution of the sovereign debt crisis in the European Union with Draghi leading the ECB, said John Briggs, a U.S. government bond strategist at RBS Securities Inc. in Stamford, Connecticut, one of 21 primary dealers required to bid at government debt auctions. “For the first in three months we don’t have something to be afraid of. There’s no Greek election, there’s no EU summit meeting.”

Jobs Data

Jobless claims unexpectedly dropped by 6,000 to 361,000 in the week ended Aug. 4, Labor Department figures showed today in Washington. The median forecast of 43 economists surveyed by Bloomberg News called for an increase to 370,000.

The data on U.S. jobless claims were available on the Labor Department’s website at 5:10 p.m. yesterday, the department said in an e-mail. Labor is conducting internal review of procedures.

Payrolls rose 163,000 in July following a revised 64,000 rise in June that was less than initially reported, Labor Department figures showed Aug. 3 in Washington. The median estimate of 89 economists surveyed by Bloomberg News called for a gain of 100,000. Unemployment rose to 8.3 percent.

Thirty-year yields will decline to 2.70 percent by the end of the third quarter, according to a Bloomberg survey of banks and securities companies with the most recent projections given the heaviest weightings.

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