Treasuries Pare Losses Before Note Auction, Fed’s Beige Book

Treasuries pared losses before the U.S. sells $21 billion of the 10-yeare notes, the second of three auctions of coupon-bearing securities this week totaling $66 billion.

Yields on the benchmark securities had reached the highest in more than two weeks before the Federal Reserve releases its Beige Book business survey. Fed Vice Chairman Janet Yellen said asset purchases by the central bank that boost U.S. economic growth will benefit the world. U.S. yields rose amid a meeting between Spanish Prime Minister Mariano Rajoy and French President Francois Hollande in Paris as investors wait to hear if Spain will request a sovereign bailout.

“The market is waiting for the auction to see what demand is before they make a decision on direction,” said 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. “There is still demand for paper in this sector as there is still a lot of uncertainty in the market.”

Benchmark 10-year note yields increased less than one basis point, or 0.01 percentage point, to 1.72 percent at 12:45 p.m. New York time, based on Bloomberg Bond Trader data. The yield touched 1.75 percent, the most since Sept. 24. The 1.625 percent security due in August 2022 fell 1/32 or 31 cents per $1,000 face amount, to 99 4/32. Thirty-year bond were little changed to yield 2.93 percent.

The 10-year notes scheduled for sale today yielded 1.73 percent in pre-auction trading, down from 1.764 percent at a previous sale on Sept. 12. That compares with a record-low auction yield of 1.459 percent on July 11.

Debt Sales

“We have supply,” said David Ader, head of U.S. government-bond strategy at CRT Capital Group LLC in Stamford, Connecticut. “It’s the most immediate thing on the horizon. At these levels, the yields are not that enticing.”

Investors at last month’s sale bid for 2.85 times the amount of debt available, versus the average of 3.11 for the past 10 auctions of the maturity. The government is scheduled to conclude this week’s sales with $13 billion of 30-year securities tomorrow.

The U.S. sold $32 billion in three-year notes yesterday at record demand. The bid-to-cover ratio, which gauges interest by comparing total bids with the amount of securities offered, was 3.96, topping the previous high last month of 3.94 and an average of 3.56 for the previous 10 sales.

The auction drew a yield of 0.346 percent, compared with a forecast of 0.350 percent in a Bloomberg News survey of nine of the Fed’s 21 primary dealers.

Yellen Speaks

U.S. government bonds have lost investors 0.4 percent this month, according to Bank of America Merrill Lynch indexes.

Yields are rising amid signs of improvement in the U.S. economy, as President Barack Obama and challenger Mitt Romney prepare to face off in a Nov. 6 general election.

U.S. unemployment 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 projected, industry and government reports showed last month.

Yellen said in Tokyo that if the Fed succeeded in rallying the U.S. economy then the whole world would win. While acknowledging different monetary policies affect capital flows and currency values, she said the Fed is not the main factor and governments have tools of their own to protect their economies.

The dollar will strengthen as U.S. growth outpaces its developed-nation counterparts, say nine of the 10 forecasters with the lowest margins of error in the six quarters ended Sept. 28 as measured by Bloomberg.

Buying, Selling

The Fed, which purchased $2.3 trillion of Treasury and mortgage-related debt from 2008 to 2011 in two rounds of purchases known as quantitative easing, announced in September a third effort in which it is buying $40 billion of mortgage debt a month until the economic recovery is well established.

The central bank sold $7.8 billion of Treasuries today as part of its Operation Twist 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.

Thirty-year yields are poised to rise further, according to DZ Bank AG, citing the moving average convergence/divergence pattern, or MACD, which tracks the difference between a shorter-and a longer-term moving average, generating buy and sell signals when they cross. The lines cut across each other today.

‘Higher Yields’

“This indicates that the bias will be toward higher yields in coming days and possibly weeks,” said Andy Cossor, the Hong Kong-based market strategist at DZ Bank, Germany’s fourth-largest lender. “The yield lows for the long bond for this year have been seen.”

The so-called MACD line is calculated by subtracting the 26-day exponential moving average from the 12-day exponential moving average. The second indicator, called the signal line, is a nine-day exponential moving average of the MACD.

In technical analysis, investors and analysts study charts of trading patterns to forecast changes in a security, commodity, currency or index.

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