Treasury 10-Year Yields Reach 3-Week Low Before Bernanke

Treasuries rose, pushing 10-year yields to the lowest level in three weeks, as data showing that inflation slowed bolstered demand at a $29 billion note sale before Federal Reserve Chairman Ben S. Bernanke speaks tomorrow.

Thirty-year yields touched the lowest in more than two weeks as the Fed bought long bonds in a program to cap borrowing costs and a measure of inflation rose the least since October 2009. Bernanke may discuss further monetary stimulus in his speech in Jackson Hole, Wyoming. Seven-year notes sold today yielded 1.081 percent, versus a forecast of 1.087 percent in a Bloomberg News survey of eight of the Fed’s 21 primary dealers.

“There is still demand for Treasuries, as a very dovish Jackson Hole speech is expected tomorrow,” said Scott Graham, head of government bond trading at Bank of Montreal’s BMO Capital Markets unit in Chicago. As a primary dealer, BMO is obliged to bid in U.S. debt sales. “The auction was strong, as there are lots of bullish underpinnings in the market.”

The yield on the benchmark 10-year note fell three basis points, or 0.03 percentage point, to 1.62 percent at 5 p.m. New York time, according to Bloomberg Bond Trader data. It touched 1.61 percent, the lowest level since Aug. 8. The price of the 1.625 percent security due in August 2022 gained 1/4, or $2.50 per $1,000 face amount, to 100.

Ten-year yields reached a record low of 1.38 percent July 25 before climbing to a three-month high of 1.86 percent on Aug. 21. They averaged 3.73 percent over the past decade.

Long Bonds

Thirty-year bond yields declined two basis points to 2.75 percent and touched 2.72 percent, the least since Aug. 13.

Yields on the current seven-year note decreased three basis points to 1.07 percent and reached 1.05 percent, the lowest since Aug. 7.

Treasury volume reported by ICAP Plc, the largest inter-dealer broker of U.S. government debt, rose to $252 billion today, after dropping to $110 billion on Aug. 27, the lowest this year. It has averaged $238 billion in 2012.

Treasuries have lost 0.6 percent in August, paring their advance for the year to 2.1 percent, Bank of America Merrill Lynch bond indexes show. They returned 9.8 percent in 2011.

Demand at the government’s auctions of $99 billion in two-, five- and seven-year notes this week rose from last month’s offerings of the same amounts of the three maturities. The average bid-to-cover ratio, a gauge of demand that compares the amount bid with the amount offered, was 3.22 at this week’s sales. The average ratio at the July offerings, when each note drew a record low sale yield, was 3.12.

Today’s sale of $29 billion in seven-year notes had a bid-to-cover ratio of 2.8 percent, versus an average of 2.79 at the past 10 offerings. The ratio at the July sale of the securities was 2.64 percent. Seven-year note yields reached a record auction low of 0.954 percent at the July sale.

Auction Bidders

Indirect bidders, an investor class that includes foreign central banks, purchased 38.4 percent of the notes sold today, the least since April, compared with an average of 40.1 percent at the past 10 sales.

Direct bidders, non-primary dealer investors that place their bids directly with the Treasury, bought 17.9 percent, the most since February. The average at the previous 10 sales was 13.5 percent.

“It was a good auction,” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities Inc. in New York. “People need paper. Bernanke is going to say he’s prepared to do what’s necessary to prevent the economy from decelerating.”

The U.S. sold $35 billion of two-year notes on Aug. 28 at a yield of 0.273 percent and the same amount of five-year notes yesterday at a yield of 0.708 percent.

Fed Purchase

The Fed bought $1.8 billion of Treasuries today due from February 2036 to May 2042. 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.

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.

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, Commerce Department data showed today. Excluding food and energy costs, the measure increased 1.6 percent in the past year.

‘Another Justification’

Bill Gross, co-chief investment officer and founder of Newport Beach, California-based Pacific Investment Management Co., manager of the world’s biggest bond fund, said in a Twitter post today the data add to the potential for more stimulus.

The core PCE inflation number of 1.6 percent is “another justification for QE3,” Gross wrote. “Bernanke stresses dual mandate and 2 percent target rate.” The Fed’s two objectives are maximum employment and price stability.

The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities narrowed to 2.27 percent today, after reaching a four-month high of 2.35 percent yesterday. The spread, called the break-even rate, shows the expected rate of price gains for the life of the debt.

Spanish Bailout

U.S. government securities extended gains earlier 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 terms are clear. The shared currency weakened 0.2 percent to $1.2506 after rising 0.3 percent earlier. Stocks fell, with the Standard & Poor’s 500 Index losing 0.8 percent.

Treasuries were at the most expensive level in three weeks, according to the 10-year 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 most costly since Aug. 6. A negative reading indicates investors are willing to accept yields below what’s considered fair value.

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