U.S. 10-Year Yields Fall to 3-Week Low as Inflation Slows

Treasuries rose, pushing 10-year yields to the lowest level in three weeks, as data showing slower inflation bolstered bets Federal Reserve Chairman Ben S. Bernanke has more room to add monetary stimulus to spur growth.

Ten-year notes reversed a decline from yesterday as a measure of inflation in a Commerce Department report increased the least since October 2009. Thirty-year yields approached the lowest in more than two weeks as the Fed bought long bonds in a program to cap borrowing costs. The Treasury will auction $29 billion in seven-year notes today.

“The focus remains on what’s going to happen with Bernanke,” said Guy LeBas, chief fixed-income strategist in Philadelphia at Janney Montgomery Scott LLC, which oversees $12 billion in fixed income assets. “Inflation is clearly decelerating, and we are facing a period of potential deflation risk. That’s the core argument behind the Fed’s stimulus-at-any-cost policy.”

The yield on the benchmark 10-year note fell three basis points, or 0.03 percentage point, to 1.63 percent at 12:14 p.m. New York time, according to Bloomberg Bond Trader data. It touched 1.61 percent, matching Aug. 28’s low, the least since Aug. 8. The price of the 1.625 percent security due in August 2022 gained 7/32, or $2.19 per $1,000 face amount, to 100.

Ten-year yields touched a record low of 1.38 percent July 25. They averaged 3.73 percent over the past decade.

Thirty-year bond yields dropped three basis points to 2.73 percent. They touched 2.72 percent Aug. 28, the lowest level since Aug. 13.

Euro Falls

Treasuries extended gains as the euro erased an advance versus the dollar after Prime Minister Mariano Rajoy said Spain will delay deciding whether to seek a bailout until aid conditions are clear. The shared currency weakened 0.3 percent to $1.2498 after rising earlier as much as 0.3 percent. Stocks fell, with the Standard & Poor’s 500 Index losing 0.7 percent.

The seven-year U.S. securities being sold today yielded 1.085 percent in pre-auction trading. They drew a record low auction yield of 0.954 percent at the prior sale on July 26.

At that offering, investors submitted orders to buy 2.64 times the amount of debt available, matching the lowest bid-to-cover ratio since October. Indirect bidders, a category that includes central banks outside the U.S., purchased 46.3 percent of the securities, the most in 11 months.

Week’s Auctions

Today’s offering is the last of three note sales this week totaling $99 billion. The U.S. sold $35 billion of five-year notes yesterday at a yield of 0.708 percent, below the 0.716 percent forecast in a Bloomberg survey. It auctioned an equal amount of two-year notes the previous day at a yield of 0.273 percent and a bid-to-cover ratio of 3.94, above the average ratio of 3.75 at the past 10 sales.

Treasuries have lost 0.6 percent in August, paring their gain for the year to 2.1 percent. They returned 9.8 percent in 2011.

The Fed purchased $1.8 billion of Treasuries today due from February 2036 to May 2042, according to the Fed Bank of New York’s website. The central bank is in the process of swapping shorter-term Treasuries in its holdings with those due in six to 30 years to put downward pressure on long-term interest rates. Traders call the effort Operation Twist after a similar program in the 1960s.

Jackson Hole

Bernanke will address the Kansas City Fed’s annual economic-policy conference in Jackson Hole tomorrow. Many policy makers at the Federal Open Market Committee’s last meeting said additional stimulus probably will be needed soon unless the economy shows signs of a durable pickup, according to minutes of the July 31-Aug. 1 policy discussions.

The central bank bought $2.3 trillion of assets in two rounds of the stimulus strategy called quantitative easing from 2008 to 2011.

“The perception is that economic growth is moving forward at stall speed and market participants like the Fed remain vigilant for any signs that growth is decelerating from this already-subdued pace,” said Chris Ahrens, an interest-rate strategist at UBS AG in Stamford, Connecticut. The firm is one of the 21 primary dealers that trade with the Fed and are obliged to bid in U.S. debt auctions.

Bernanke’s remarks at the past two Jackson Hole conferences signaled moves to spur economic growth. At the August 2011 event, he said the Fed “has a range of tools that could be used to provide additional monetary stimulus.” The central bank announced Operation Twist on Sept. 21.

At the Wyoming conference on Aug. 27, 2010, Bernanke said the U.S. central bank “will do all that it can” to ensure a continuation of the economic recovery and that more securities purchases might be warranted if growth slowed. It announced a $600 billion round of Treasury purchases in November 2010.

Inflation Gauge

Treasuries rose today as Commerce Department data showed a gauge of prices tied to consumer spending advanced 1.3 percent in the 12 months ended in July, the smallest gain since October 2009 and below the Fed’s long-run goal of 2 percent. Excluding food and energy costs, the measure increased 1.6 percent in the past year.

U.S. consumer spending rose in July for the first time in three months, increasing 0.4 percent, department data showed.

A separate report from the Labor Department showed initial claims for jobless benefits in the U.S. were little changed last week from an upwardly revised figure for the prior week.

The 10-year term premium, a model created by economists at the Fed that includes expectations for interest rates, growth and inflation, was at negative 0.89 percent today, the most expensive level in three weeks. A negative reading indicates investors are willing to accept yields below what’s considered fair value.

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