Treasuries Little Changed on Greece Talks Before U.S. Auction

Treasuries were little changed as European policy makers eased terms on loans to Greece and the U.S. prepares to sell $35 billion in two-year debt, the first of three auctions this week totaling $99 billion.

U.S. 10-year note yields fluctuated after a report showed orders for durable goods in October exceeded forecasts. U.S. securities were supported earlier today on speculation a plan agreed on by euro-area finance ministers for Greece to buy back its bonds will fail to contain the region’s debt crisis. The Federal Reserve bought $1.9 billion of Treasuries today and is acquiring as much as $18.9 billion in six purchases this week as part of its Operation Twist program to put downward pressure on long-term borrowing costs.

“The market, in general, is better bid off the uncertainty in Europe and the fiscal cliff,” said Sean Murphy, a trader at Societe Generale SA in New York, one of the 21 primary dealers that are required to bid at government debt auctions. “Unless you get clarity on either side of the fence, you’re not going to stray too far. That keeps us in a tight trading range.”

The benchmark 10-year yield fell one basis point, or 0.01 percentage point, to 1.66 percent at 11:08 a.m. in New York, according to Bloomberg Bond Trader prices. The 1.625 percent note due in November 2022 traded at 99 3/4.

Yield Outlook

The benchmark yield will probably climb to 1.98 percent by the middle of next year, according to a Bloomberg survey of financial companies.

The U.S. two-year notes scheduled for sale today yielded 0.28 percent in pre-auction trading. The prior auction of the maturity on Oct. 23 drew record purchases from the group of investors that includes pension funds and insurance companies. So-called direct bidders, or institutional investors outside of the primary dealers, bought 38.2 percent of the notes. That compares with a 12.2 percent average at the previous 10 auctions.

The U.S. will sell $35 billion of five-year debt tomorrow and $29 billion of seven-year notes on Nov. 29.

The Fed bought Treasuries maturing from February 2023 to May 2030 today, according to the Fed Bank of New York’s website. The central bank is selling shorter-term Treasuries and buying those due in six to 30 years.

Market Position

Investors in Treasuries held bullish bets unchanged this week, while cutting shorts, according to a survey by JPMorgan Chase & Co.

The proportion of net longs was at four percentage points in the week ending yesterday, according to JPMorgan, up from two percentage points the week ending Nov. 19.

The percent of outright longs remained at 17 percent, while the percent of outright shorts, or bets the securities will fall in value, dropped to 13 percent, from 15 percent, according to the survey.

Investors raised neutral bets to 70 percent from 68 percent, the survey reported, matching the highest level since August.

The approach of the fiscal cliff budget deadline in the U.S. has been accompanied by low volume and low volatility in the Treasury market.

Volatility in U.S. government bonds dropped to the lowest in more than five years yesterday. Bank of America Merrill Lynch’s MOVE index, which measures price swings for Treasuries based on options, fell to 53.5, the least since May 2007.

Trading Pace

Treasury trading volume dropped yesterday to $150 billion, compared with the 2012 daily average of $240 billion, according to ICAP Plc, the largest inter-dealer broker of U.S. government debt.

President Barack Obama is working with lawmakers to try to ease the measures to keep gross domestic product growing. So far, talks between Obama and congressional Republicans haven’t yielded any significant progress. Ten-year yields have been in a range of 35 basis points since the middle of August.

Euro-region finance ministers meeting in Brussels overnight cut the rates on Greece’s bailout loans, suspended interest payments for a decade, gave the country more time to repay and engineered a Greek bond buyback.

Fed Bank of Dallas President Richard Fisher said he advocates limits on U.S. quantitative easing.

The Fed could “pursue a different course” and announce “a limit as to how much we are going to acquire of Treasuries and mortgage-backed securities, say up to a limit of X, up to a point where our balance sheet reaches that,” Fisher said in a speech today in Berlin.

Economic Data

Demand for goods such as machinery and electronics climbed in October by the most in five months, signaling companies are starting to overcome concern the looming fiscal cliff will derail the U.S. economy.

Bookings for non-defense capital goods excluding aircraft, a proxy for future business investment, rose 1.7 percent last month, the most since May, the Commerce Department reported today in Washington. Orders for all durable goods were little changed, beating the median forecast of economists surveyed by Bloomberg that projected a 0.7 percent drop.

“The numbers are better for the growth bulls than for the growth bears,” said Steven Ricchiuto, chief economist in New York at Mizuho Securities USA Inc., a primary dealer. “We’ve got an economy that’s still trending sideways.”

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