Treasuries Gain by Most in Three Weeks After IMF Cuts Forecasts

Treasury 10-year notes rose the most in three weeks after the International Monetary Fund cut its economic forecasts and said there is an “alarmingly high” risk of a steeper slowdown.

The gains pushed 30-year bond yields down from almost the highest level in more than two weeks as investors sought the securities as a haven. U.S. debt was also buoyed as European Union ministers prepared to meet in Luxembourg amid a lack of clarity about whether Spain will ask for external financial aid. The U.S. plans to sell three-year notes today, the first of three auctions of coupon-bearing Treasuries this week totaling $66 billion.

“The general trend for rates is higher and what’s been holding them down is Europe with all this stuff about Spain,” said Aaron Kohli, an interest-rate strategist BNP Paribas SA in New York, one of 21 primary dealers that are required to bid at government-debt auctions. “That started us off on a better footing for Treasuries.”

Benchmark 10-year note yields slid four basis points, or

0.04 percentage point, to 1.70 percent at 11:12 a.m. New York time, based on Bloomberg Bond Trader data, after falling as much as six basis points, the most since Sept. 18. The 1.625 percent security due in August 2022 gained 11/32, or $3.44 per $1,000 face amount, to 99 9/32.

Thirty-year bond yields dropped four basis points, to 2.93 percent, after reaching 2.97, matching the most since Sept. 21.

The Treasury market was closed yesterday for Columbus Day.

Notes Sale

The U.S. plans to sell $32 billion of three-year debt today, $21 billion of 10-year securities tomorrow and $13 billion of 30-year bonds on Oct. 11.

Investors at the most recent three-year auction on Sept. 11 submitted bids for 3.94 times the amount of debt offered, an all-time high. The three-year notes scheduled for sale today yielded 0.34 percent in pre-auction trading, compared with 0.337 percent at last month’s sale and 0.334 percent in September 2011, a record auction low yield.

Demand will be strong at the auction, “aided by the safe-haven bid on the vast global uncertainties and the Fed’s most recent pledge to keep rates exceptionally low through at least mid-2015,” Justin Lederer, an interest-rate strategist at Cantor Fitzgerald LP in New York, one of 21 primary dealers that are required to bid at government debt auctions, wrote in a note to clients.

The government has attracted a record $3.16 in bids for each dollar of the $1.59 trillion of securities it has sold in 2012, according to data compiled by Bloomberg. That exceeds the previous high of $3.04 set last year.

Fed Buying

The Federal Reserve bought $1.889 billion of Treasuries maturing from February 2036 to August 2042 today as part of its program to replace $267 billion of short-term debt in its portfolio with longer-term Treasuries in an effort to reduce borrowing costs further and counter rising risks of a recession.

U.S. debt has shrunk to a six-year low relative to the size of the economy as homeowners, cities and companies cut borrowing.

Total indebtedness including that of federal and state governments and consumers has fallen to 3.29 times gross domestic product, the least since 2006, from a peak of 3.59 four years ago, according to data compiled by Bloomberg. Private-sector borrowing is down by $4 trillion to $40.2 trillion.

The world economy will expand 3.3 percent this year, the slowest pace since the 2009 recession, and 3.6 percent next year, the IMF said. That compares with July predictions of 3.5 percent in 2012 and 3.9 percent in 2013. The Washington-based lender said it sees a one-in-six chance that growth will slip below 2 percent.

‘Fiscal Consolidation’

“The news flow overnight hasn’t been particularly attractive for risk assets,” said Michael Leister, a fixed-income strategist at Commerzbank AG in London. There’s “this lack of euro-zone leaders to deliver a breakthrough. All these factors are coming together to give Treasuries a bid,” he said.

European Central Bank President Mario Draghi said there is no alternative to austerity as Italian and Spanish officials balk at asking for bailouts that may impose more budget cuts, further depressing their economies.

“It’s without doubt that the process of fiscal consolidation has depressed output in parts of the euro area,” Draghi told lawmakers at the European Parliament in Brussels today. “But what’s the alternative? We need to do that, we need to do that in the best possible way, as effective and as short as possible, complying with basic grounds of social justice.”

Liquid Bonds

Fort Washington Investment Advisors in Cincinnati, which oversees $42 billion, has been taking money out of the stock market, Nick Sargen, the chief investment officer, said on Bloomberg Television’s “First Up” with Susan Li.

“We’re parking it in bonds that are fairly liquid,” said Sargen, a former economist at the San Francisco Fed. “What I want is to have that money available to buy stocks back when they’re cheaper.”

There are signs of improvement in the U.S. economy, as President Barack Obama and challenger Mitt Romney prepare for the leadership election on Nov. 6.

The U.S. jobless rate declined to 7.8 percent in September from 8.1 percent the month before, the Labor Department reported Oct. 5. Existing-home sales and retail sales were both stronger in August than analysts expected, industry and government reports showed last month.

Debt strategists at top-ranked Wall Street firms can’t agree on what investors should do as yields on everything from government to corporate and asset-backed bonds plunge to record lows.

Mixed Views

While JPMorgan Chase & Co. forecasts a “year-end storm in the market for U.S. Treasuries,” Barclays Plc advises buying government bonds and cutting investment-grade company debt. Bank of America Corp. recommends high-grade bonds over both junk-rated and U.S. government notes. The three firms are rated the best at fixed-income research by Institutional Investor magazine.

Ten-year Treasury yields will rise to 1.75 percent by Dec. 31 and to 2.06 percent by the end of June, according to a Bloomberg News survey of economists, with the most recent projections given the heaviest weightings.