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Treasury 10-Year Yields Tumble Most Since June

Treasury 10-year yields slid the most in almost three months after minutes of the Federal Reserve’s last meeting showed many policy makers said additional stimulus would probably be needed soon unless the economy shows signs of a durable pickup.

U.S. 30-year yields fell the most in seven weeks as the central bank bought $1.8 billion of longer-term Treasuries as part of an effort to cap borrowing costs. Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., wrote on Twitter there’s an 80 percent chance of a third round of Fed debt purchases under quantitative easing and an extension of the pledge to keep interest rates at almost zero.

“They gave the market what it wanted to hear,” said William Larkin, a fixed-income money manager who helps oversee $500 million at Cabot Money Management Inc. in Salem, Massachusetts. “They can’t take away talk about QE3 because the market built up momentum on that belief. It would make sense to have that as a potential driver going forward.”

The 10-year yield tumbled 11 basis points, or 0.11 percentage point, to 1.69 percent at 5:16 p.m. New York time, according to Bloomberg Bond Trader prices. It was the biggest intraday decrease since June 1. The price of the 1.625 percent security due in August 2022 rose 31/32, or $9.69 per $1,000 face amount, to 99 3/8. The yield, which reached a record low 1.379 percent on July 25, yesterday touched its 200-day moving average of 1.86 percent.

Thirty-year bond yields dropped 10 basis points to 2.80 percent in their biggest intraday slide since July 2. They increased for the past two days above their 200-day moving average of 2.96 percent.

Volume Increases

Treasury trading volume reported by ICAP Plc, the largest inter-dealer broker of U.S. government debt, jumped to about $284 billion in New York, from $208 billion yesterday. The daily volume has averaged $239 billion this year.

Volatility dropped to 66.8 basis points, the lowest level since July 26, according to Bank of America Merrill Lynch’s MOVE index. The figure is below the 2012 average of 75 basis points. Volatility dropped to a five-year low of 56.7 basis points on May 7 and touched a 2012 high of 95.4 basis points on June 15. The index measures price swings based on options.

The difference between the yields on the two-year note and the 30-year bond narrowed to the least in more than a week. The gap, called the yield curve, decreased to 255 basis points, the least since Aug. 13, from 261 basis points yesterday. The 2012 average is 268 basis points.

‘Additional Support’

Many participants at the Fed’s July 31-Aug. 1 meeting said that a new large-scale asset-purchase program “could provide additional support for the economic recovery,” according to the record of the Federal Open Market Committee’s gathering released today in Washington.

The central bank purchased $2.3 trillion of mortgage and Treasury debt from 2008 to 2011 in two rounds quantitative easing. It also has pledged to keep its key interest rate at zero to 0.25 percent, where it’s been since 2008, until at least late 2014.

“The minutes were slightly more dovish than I had expected,” said Gary Pollack, who helps manage $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York. “It implies that QE3 is on the table and could be implemented fairly soon if the economic data doesn’t turn around. Since then, the data have been stronger than the market anticipated.”

Sales, Payrolls

Retail sales rose 0.8 percent in July, the first increase in four months, a Commerce Department report showed on Aug. 14. Industrial production gained 0.6 percent, more than forecast, Fed figures showed the next day. Payrolls added 163,000 jobs, the most in five months, the Labor Department said Aug. 3. Still, the unemployment rate has remained stuck above 8 percent for more than three years.

“Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery,” the minutes said.

The term premium, a model created by economists at the Fed that includes expectations for interest rates, growth and inflation, shows Treasuries are the most expensive since Aug. 6. The gauge was negative 0.84 percent today, after reaching negative 0.70 percent on Aug. 16, the least costly since May. It reached a record negative 1.02 percent, the most expensive level ever, on July 24. A negative reading indicates investors are willing to accept yields below what’s considered fair value.

Note Auctions

The U.S. is scheduled to announce tomorrow the sizes of its auctions next week of two-, five- and seven-year notes.

It will probably sell $35 billion of two-year debt on Aug. 28, the same amount of five-year notes the following day and $29 billion of seven-year securities on Aug. 30, according to Wrightson ICAP LLC, an economic advisory company based in Jersey City, New Jersey.

U.S. government securities have lost 1.4 percent this month, according to a Bank of America Merrill Lynch index.

The Fed bought Treasuries today due from February 2036 to February 2042 as part of its effort to exchange shorter-term U.S. debt in its holdings for securities due in six to 30 years to put downward pressure on long-term borrowing costs.

The central bank has been accelerating purchases of more newly issued Treasuries as part of the program while primary dealers’ willingness to offer securities to the central bank ebbs. It included the current 30-year bond in the range of debt it would consider today, but didn’t buy the maturity.

Japanese Trade

Government securities, which fell for the past four weeks, advanced earlier after Japanese trade figures fell short of economists’ forecasts, adding to concern Europe’s debt crisis and a slowdown in China are damping global growth.

Japan’s exports fell 8.1 percent in July from a year earlier, the Ministry of Finance said in Tokyo. Economists surveyed by Bloomberg forecast a decline of 2.9 percent.

Japanese shipments to the European Union slumped 25 percent, the biggest drop since October 2009, and those to China slipped 12 percent, the ministry said. European governments are struggling to find ways to pay their debts, while China’s gross domestic product growth has slowed for six quarters.

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