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Treasury 10-Year Yield Reaches Three-Week Low on Fed Speculation

Treasury 10-year yields fell to the lowest in almost three weeks before the U.S. sells $35 billion in two-year notes amid bets the Federal Reserve will undertake a third round of bond purchases under quantitative easing.

U.S. government debt rose earlier after Japan cut its economic assessment amid slowing prospects for global growth. Treasuries have fallen 0.6 percent in August, trimming a loss of as much as 1.6 percent earlier in the month, Bank of America Merrill Lynch data showed. Fed Chairman Ben S. Bernanke will speak Aug. 31 at a conference in Jackson Hole, Wyoming, where he is expected to share his views on the need for stimulus.

“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. “With all the uncertainty out there, the two-year auction will go just fine.”

The 10-year yield fell two basis points, or 0.02 percentage point, to 1.63 percent at 12:23 p.m. New York time, according to Bloomberg Bond Trader prices. It was the lowest since Aug. 8. The price of the 1.625 percent note maturing in August 2022 gained 6/32, or $1.88 per $1,000 face amount, to 99 31/32.

Two-year note yields were little changed at 0.27 percent today, and yields on 30-year bonds decreased two basis points to 2.74 percent.

More Costly

Treasuries are the most expensive 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 0.89 percent today, the costliest since Aug. 6. It reached negative 0.70 percent Aug. 16, the least expensive since May. A negative reading indicates investors are willing to accept yields below what’s considered fair value.

The Treasury is selling $99 billion in notes this week, including $35 billion of five-year securities tomorrow and $29 billion of seven-year debt on Aug. 30.

The two-year securities being sold today yielded 0.275 percent in pre-auction trading, compared with 0.22 percent at the previous offering on July 24, a record auction low.

Investors bid for 4 times the amount of available debt last month, the most since the all-time high of 4.07 in November at the monthly auctions. Indirect bidders, the category of buyers that includes foreign central banks, purchased 30.9 percent, the least since December.

The securities were underpinned by speculation the Fed will inject additional capital into the economy.

‘Some Impact’

More Fed stimulus would have “some impact,” especially if the central bank focuses on buying mortgage securities, said Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., the world’s largest manager of bond funds, in an interview with Betty Liu on Bloomberg Television. The housing market is “healing,” and Fed stimulus for that is critical to the overall recovery, El-Erian said.

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

Bernanke is scheduled to speak at the end of the week at the Kansas City Fed’s annual economic 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.

Fed Purchase

The central bank also is swapping shorter-term Treasuries in its holdings with those due in six to 30 years to put downward pressure on long-term borrowing costs. It bought $4.65 billion today of securities due from November 2020 to August 2022 as part of the program.

Treasuries remained higher today after a report showed home prices in 20 U.S. cities climbed in June from a year earlier, the first gain in almost two years. The S&P/Case-Shiller index increased 0.5 percent from June 2011, the first increase since September 2010, the group’s data showed. Economists in a Bloomberg News survey forecast a 0.05 percent drop.

Confidence among U.S. consumers fell in August by the most in 10 months, another report showed. The Conference Board’s index decreased to 60.6 from a revised 65.4 in July, figures from the New York-based private research group showed. The 4.8-point decrease was the biggest since October. Economists in a Bloomberg survey projected a reading of 66.

Bond Returns

An index of U.S. investment-grade and high-yields bonds showed they returned 0.1 percent this month through yesterday, and 8.2 percent in 2012, the Bank of America Merrill Lynch data show. Treasuries gained 2.1 percent in 2012, the data showed.

The MSCI All-Country World Index of stocks returned 2.9 percent in August as of yesterday, rallying 11 percent this year, according to data compiled by Bloomberg.

The 10-year yield faces significant resistance at 1.63 percent, said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. If it breaches that level, it may fall to 1.585 percent. Resistance is an area on a chart where sell orders may be clustered.

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

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.

China faces “difficulties,” Premier Wen Jiabao said, Xinhua News Agency reported on Aug. 25. Germany and France are planning measures on European integration as they battle an economic contraction.

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