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Treasuries Fluctuate With Fed Forecast to Keep Monetary Stimulus

Oct. 24 (Bloomberg) -- Treasuries fluctuated after the U.S. sale of $35 billion in five-year notes as Federal Reserve policy makers are forecast to retain plans to buy $40 billion in mortgage-backed securities each month for an indefinite period.

U.S. 10-year note yields rose earlier as a government report showed U.S. new home sales increased to a two-year high in September, damping demand for the safest securities. The five-year note auction saw the most demand since November 2010 from non-primary dealer investors including pension funds and insurance companies, while overall bidding was lower than average. The Federal Open Market Committee releases a policy statement at 2:15 p.m. New York time.

“The market is waiting for the FOMC news to possibly give us direction,” said Justin Lederer, an interest-rate strategist at Cantor Fitzgerald LP in New York, one of 21 primary dealers that trade with the Fed. “The auction was OK, but the market is looking forward to the uncertainty of the election, the fiscal cliff and the other uncertainties.”

The yield on the benchmark 10-year note rose one basis point, or 0.01 percentage point, to 1.77 percent at 1:32 p.m. New York Time, according to Bloomberg Bond Trader Prices. The 1.625 percent note due in August 2022 fell 1/8, or $1.25 per $1,000 face amount, to 98 21/32. The yield climbed to 1.83 percent Oct. 18, the highest level since Sept. 18.

The yield on the current five-year note was little changed at 0.75 percent.

Auction Results

The five-year notes sold today drew a yield of 0.774 percent, compared with a forecast of 0.775 percent in a Bloomberg News survey of seven of the Federal Reserve’s primary dealers.

The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.73, compared with an average of 2.92 for the previous 10 sales.

Direct bidders purchased 15.5 percent of the notes, compared with an average of 10.2 percent at the last 10 auctions. Indirect bidders, an investor class that includes foreign central banks, purchased 42.3 percent of the notes, compared with an average of 42.7 percent for the past 10 sales.

“The auction was very vanilla,” said Thomas Simons, a government debt economist in New York at Jefferies Group Inc., one of 21 primary dealers that trades with the Fed. “The auction did better than five-year note auctions have done of late and there was strong real investor demand, but we did tail a bit. Anytime you have real money demand like we saw today, then it’s generally an OK sale.”

Debt Returns

Five-year notes have returned 1.7 percent this year, matching the 1.7 percent gain by Treasuries overall, according to Bank of America Merrill Lynch indexes. The five-year securities rose 9.2 percent in 2011, while Treasuries overall advanced 9.8 percent.

Today’s offering is the second of three this week totaling $99 billion. The government will sell $29 billion in seven-year securities tomorrow. Yesterday’s auction of $35 billion in two-year notes yielded 0.295 percent.

The 10-year yield will increase to 2.06 percent by June 30, according to a Bloomberg survey of economists with the most recent forecasts given the heaviest weightings.

New home sales climbed 5.7 percent to a 389,000 annual pace, the most since April 2010, following a revised 368,000 rate in August, figures from the Commerce Department showed today in Washington. The median estimate of 75 economists surveyed by Bloomberg called for sales to rise to 385,000.

Economic Data

“The stronger U.S. data that we have seen means there’s no need to add extra stimulus,” said Craig Collins, managing director of rates trading at Bank of Montreal in London. “The Fed is happy to wait and see that hopefully the trend of better data continues. The Treasury market won’t have a problem digesting the five-year supply today.”

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co. in Newport Beach, California, said in a twitter message that the Fed may announce a target for economic growth at the end of its policy meeting today, and such a move “would be reflationary.”

The Fed may switch from its “extended period” language and adopt a target for gross domestic product “or something close” today or at its meeting in December, Gross wrote. The Fed statement is scheduled for 2:15 p.m. New York time.

The central bank at its previous meeting on Sept. 12-13 pledged to keep its benchmark interest rate near zero at least through the middle of 2015. Charles Evans, president of the Fed Bank of Chicago, has said policy makers should promise to keep rates low until the unemployment rate falls to 7 percent, as long as inflation does not breach 3 percent.

The difference between yields on 10-year notes and same-maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt, was 2.49 percentage points. The average over the past decade is 2.17 percentage points.

To contact the reporter on this story: Cordell Eddings in New York at

To contact the editor responsible for this story: Dave Liedtka at

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