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Treasury 10-Year Yields in Narrowest Range Since 2010

Treasury Yields Are Highest Versus G-7 Peers in Eight Months
The Fed is also exchanging short-term Treasuries from its holdings for longer-term debt under a program scheduled to end by Dec. 31. Photographer: Andrew Harrer/Bloomberg

Treasury 10-year notes traded in the tightest range since 2010 as risk appetite fluctuated before the Federal Reserve begins a policy meeting tomorrow and as investors await developments in U.S. budget talks.

Bonds rose earlier as Italian Prime Minister Mario Monti said he intends to quit, fueling concern Europe’s debt crisis will worsen. Dealers that trade with the U.S. central bank predict the Federal Open Market Committee will decide to start buying as much as $45 billion of Treasuries a month. The U.S. will auction $66 billion in notes and bonds this week.

“The market is waiting on confirmation of a deal out of Washington and the result of the FOMC meeting to make any real moves,” said Sean Murphy, a trader in New York at Societe Generale, one of the 21 primary dealers that trade with the Fed. “Until then, we are trading in a very tight range at low levels.”

Benchmark 10-year note yields were little changed at 1.62 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. They swung between 1.625 percent and 1.5959 percent, the narrowest daily range since February 2010. Ten-year yields reached a record low of 1.38 percent on July 25. The price of the 1.625 percent security due in November 2022 added 1/32, or 31 cents per $1,000 face amount, to 100 2/32.

Thirty-year bond yields fell one basis point to 2.8 percent after increasing to 2.81 percent and declining to 2.78 percent.

Volume Drops

Treasury volume reported by ICAP Plc, the largest inter-dealer broker of U.S. government debt, fell to $138 billion, the lowest level since Nov. 23. It has averaged $239 billion in 2012 and touched a high for the year of $464 billion in September.

Volatility in Treasuries rose last week from the lowest level since 1988. Bank of America Merrill Lynch’s MOVE index, which measures price swings based on options, increased to 53 basis points on Dec. 7 after touching 51 basis points on Dec. 3. It has averaged 71 basis points this year. Volatility climbed to 265 basis points in October 2008 as the financial crisis intensified.

The Standard & Poor’s 500 Index was little changed today after rising as much as 0.3 percent and falling 0.2 percent.

U.S. leaders are grappling with a budget-deficit showdown that may push the world’s largest economy into recession. The nation faces a fiscal cliff of $607 billion in automatic spending cuts and tax boosts starting Jan. 1 if lawmakers can’t reach agreement. That would cause the economy to contract 0.5 percent next year, according to the Congressional Budget Office.

Latest Headwind

“The fiscal cliff is the latest in the checklist of hurdles we want to get past to see if the economy can overcome that one,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee. “We’re still in this idea that as soon as headwinds are done the economy will get better, and the fiscal cliff is the latest headwind. We’ve told ourselves that story now for three years. Whether it really works, we haven’t had a long-enough stretch without headwinds to really know.”

Dealers that trade securities with the Fed expect it to decide at its two-day meeting to begin buying Treasuries and to keep benchmark interest rates about zero into 2015, Bloomberg surveys show.

The purchases, which would supplement the Fed’s $40 billion of mortgage-bond purchases each month, would follow the expiration at year-end of the Operation Twist program to replace $667 billion of short-term debt in the central bank’s holdings with the same amount of longer-term bonds. The Fed bought $1.98 billion today of securities maturing from February 2036 to November 2042.

The central bank pumped $2.3 trillion into the financial system from 2008 to 2011 in two rounds of the stimulus strategy called quantitative easing.

Treasury Auctions

The Treasury is scheduled to auction $32 billion of three-year notes tomorrow, $21 billion of 10-year debt the next day and $13 billion of 30-year bonds on Dec. 13.

Short-term Treasuries may be supported by a potential flood of cash into the U.S. money markets if unlimited Federal Deposit Insurance Corp. coverage ends as scheduled later this month.

“It could push yields at the front end of the Treasury curve even closer to zero than they currently are right now,” William Irving, manager of the Fidelity Government Income Fund at Boston-based Fidelity Investments, said in an interview with Tom Keene on Bloomberg Radio.

Monti, Italy’s unelected technocrat leader, will try to pass budget legislation before stepping down, President Giorgio Napolitano’s office said in a statement. Monti said Dec. 8 he will quit due to parliamentary opposition from former Prime Minister Silvio Berlusconi and his allies, who previously backed the government.

Italian 10-year bond yields climbed as much as 38 basis points, the biggest jump since Aug. 2, to 4.9 percent, the highest level in more than two weeks.

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