Treasury 10-Year Yields Fall to 3-Week Low Amid Fed Speculation

Treasuries rose, pushing 10-year note yields to the lowest level in almost three weeks, as speculation the Federal Reserve will begin a third round of bond purchases under quantitative easing this year stoked demand.

The government’s auction of $35 billion in two-year securities drew more bids than average. Treasuries have trimmed an August loss to 0.6 percent amid bets on further stimulus, from as much as 1.6 percent earlier this month, Bank of America Merrill Lynch data showed,. Fed Chairman Ben S. Bernanke may discuss stimulus Aug. 31 in a speech at a conference in Jackson Hole, Wyoming.

“There’s a growing consensus we’ll be seeing QE from the Fed,” said Larry Milstein, managing director in New York of government and agency debt trading at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors. “Everybody is looking toward both Jackson Hole and what we may see from the Fed in terms of further discussion of what they’ll be purchasing in QE3.”

The benchmark 10-year yield fell two basis points, or 0.02 percentage point, to 1.63 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. It touched 1.61 percent, the lowest since Aug. 8. The price of the 1.625 percent security due in August 2022 gained 5/32, or $1.56 per $1,000 face amount, to 99 29/32.

Ten-year yields slid to a record low 1.38 percent on July 25 and rose to a three-month high of 1.86 percent on Aug. 21.

Yields on the current two-year note were little changed at 0.26 percent. Thirty-year bond yields decreased one basis point to 2.75 percent.

‘Just Waiting’

“The market is still relatively well bid, as no one wants to take big risk bets ahead of Jackson Hole,” said Thomas Simons, a government debt economist in New York at Jefferies Group Inc., one of 21 primary dealers required to bid in U.S. debt auctions. “Everyone is just waiting for Bernanke.”

Treasuries are at the most expensive level in three weeks, according to the term premium, a model created by economists at the Fed that includes expectations for interest rates, growth and inflation. The gauge was at negative 0.88 percent today, the costliest since Aug. 6. It reached negative 0.70 percent on Aug. 16, the least expensive since May. A negative reading indicates investors are willing to accept yields below what’s considered fair value.

The two-year notes sold today drew a yield of 0.273 percent, compared with 0.275 percent in pre-auction trading. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.94, versus an average of 3.75 at the past 10 sales.

Auction Bidders

Indirect bidders, an investor class that includes foreign central banks, purchased 22.3 percent of the notes at today’s auction, the least since December. The average was 33.4 percent at the past 10 sales.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 16.1 percent of the notes, the most since March, versus with an average of 10.8 percent at the past 10 auctions.

“It wasn’t a bad auction, but it wasn’t a particularly great auction,” said Simons of Jefferies. “It’s the week before Labor Day, and markets aren’t excited about much at the moment.”

The Treasury is selling $99 billion in notes this week. It’s due to auction $35 billion of five-year securities tomorrow and will sell $29 billion of seven-year debt on Aug 30.

Prospects are good for the remaining two auctions this week amid expectations for Fed stimulus, Pressprich’s Milstein said.

Two-year notes have returned 0.1 percent this year, versus a 2.1 percent gain by Treasuries overall, according to Bank of America Merrill Lynch indexes. The two-year securities returned 1.5 percent in 2011, while Treasuries overall rose 9.8 percent.

Quantitative Easing

The Fed purchased $2.3 trillion of Treasury and mortgage-related debt in two rounds of quantitative easing from 2008 to 2011 to spur economic growth. Its next meeting is Sept. 12-13.

Bernanke is scheduled to speak at the Kansas City Fed’s annual economics symposium. Minutes of the July 31-Aug. 1 meeting of the Federal Open Market Committee, released last week, showed many policy makers said additional stimulus probably will be needed soon unless the economy shows signs of a durable pickup.

“The market is under the impression that QE3 is around the corner,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC a New York-based brokerage for institutional investors.

Outline Options

Bernanke probably won’t offer specific plans in the Jackson Hole speech, Pacific Investment Management Co.’s Mohamed El-Erian said in an interview on Bloomberg Television’s “In the Loop” with Betty Liu.

“The minutes were consequential, and we don’t expect Bernanke to take it further than what the minutes said,” said El-Erian, the co-chief investment officer at Pimco, the world’s largest manager of bond funds. “It’s highly probable that he will outline the options that the Fed has available and the commitment to do more if needed.”

Treasuries gained earlier today as a report showed risks to the Japanese economy include a “further slowing down of overseas economies and sharp fluctuations in the financial and capital markets.” The outlook was in a monthly report the Cabinet Office released in Tokyo.

Hurricane Isaac and a deadly blast at a Venezuelan refinery pushed gasoline to an almost four-month high.

Oil Output

Group of Seven nations called on oil-producing countries to increase output and said they “stand ready to call upon the International Energy Agency to take appropriate action to ensure that the market is fully and timely supplied.”

G-7 finance ministers are monitoring the risks posed by high oil prices, according to a G-7 joint statement issued today by the U.S. Treasury Department.

Treasury volume reported by ICAP Plc, the largest inter-dealer broker of U.S. government debt, rose to $203 billion today, after dropping yesterday to about $110 billion, the lowest level this year. It has averaged $238 billion in 2012.

Volatility was little changed yesterday at 66.3 basis points, below the 2012 average of 75 basis points, according to Bank of America Merrill Lynch’s MOVE index. 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.

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