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Treasuries Rise Before Fed Purchases as Selloff Brings Buyers

Treasury 30-year bonds rose, paring the previous week’s steepest fall since September, as higher yields, concern over the debt ceiling and the prospect of more central-bank debt purchases attracted investors.

Treasury benchmark 10-year note yields at almost the highest level since May lured buyers back to the market as the Federal Reserve prepared to purchase as much as $9.75 billion in longer-dated debt next week, part of its third round of bond purchases under the quantitative-easing strategy.

“We still look forward to a divisive and vigorous debate over the next round of fiscal matters, and the Fed is still buying aggressively,” said Christopher Sullivan, who oversees $2.1 billion as chief investment officer at United Nations Federal Credit Union in New York. “We’ve had a bit of a selloff with some optimism returning to the market, but the concerns haven’t completely dissipated.”

The yield on the 30-year bond fell five basis points, or 0.05 percentage point, to 3.05 percent in New York this week after touching 3.12 percent, according to Bloomberg Bond Trader prices. The price of the 2.75 percent note due in November 2042 rose 29/32, or $9.06 per $1,000 face value, to 94 5/32.

The 10-year yield fell three basis points to 1.87 percent in New York time after climbing to 1.93 percent.

Least Expensive

Yields on the 10-year note last week reached 1.97 percent, the highest level since April 26, before dropping after the Labor Department released a report showing the U.S. unemployment rate was unchanged at 7.8 percent in December.

Yields also declined this week as demand for Italian bonds at an auction indicated the region’s sovereign-debt crisis is easing as European Central Bank President Mario Draghi said the euro-area economy will slowly return to health in 2013.

U.S. government securities traded close to the least expensive levels in eight months. The 10-year term premium, a model created by economists at the Fed that includes expectations for interest rates, growth and inflation, touched negative 0.69 percent. It reached negative 0.68 percent on Jan. 3, the least costly since May.

A negative reading indicates investors are willing to accept yields below what’s considered fair value. The average last year was negative 0.77 percent.

Debt Auctions

U.S. government debt rose after the Treasury Department sold $66 billion in notes and bonds this week. It sold $13 billion of 30-year debt at a yield of 3.07 percent, $21 billion of 10-year debt at a yield of 1.863 percent and $32 billion of three-year notes at a yield of 0.385 percent.

There isn’t another note, bond or inflation-linked debt auction until Jan. 24, when the Treasury is scheduled to sell 10-year Treasury Inflation Protected Securities.

The Fed’s preferred measure of inflation expectations, the five-year, five-year forward break-even rate, was 2.82 percent on Jan. 8, compared with a 2012 average of 2.6 percent. The gauge projects the expected pace of consumer price increases from 2018 to 2023.

“The Fed’s going to be supportive of the market,” said Mario De Rose, a fixed-income strategist in St. Louis at Edward Jones & Co. “At this point the hawks aren’t going to have much say in policy.”

The Federal Open Market Committee for the first time in December linked the outlook for its main interest rate to unemployment and inflation targets. The central bank said the rate would stay close to zero “at least as long” as unemployment remains above 6.5 percent and inflation projections are for no more than 2.5 percent.

Unemployment, Inflation

The unemployment rate, which has been above 7 percent since December 2008, held at 7.8 percent in November. In the 12 months ended in November, consumer prices rose 1.8 percent, the Labor Department reported in December.

The U.S. reached its debt ceiling Dec. 31 and, without an extension of the spending limit, the Treasury will exhaust measures to finance the government as early as mid-February, according to the Congressional Budget Office. Moody’s Investors Service warned Jan. 2 that further measures to control the deficit were needed to support the nation’s top Aaa rating.

Hedge-fund managers and other large speculators reversed from a net-long position to a net-short position in 30-year bond futures in the week ending Jan. 8, according to U.S. Commodity Futures Trading Commission data. Speculative short positions, or bets prices will fall, outnumbered long positions by 7,449 contracts on the Chicago Board of Trade. Last week, traders were net-long 435 contracts.

Treasuries handed investors a loss of 0.6 percent this year through Jan. 10, according to Bank of America Merrill Lynch indexes. German bonds dropped 1.6 percent and Japan’s fell 0.1 percent, the data show.

“As we get closer to 2 percent, investors will jump back into the market,” said Sean Murphy, a trader at Societe Generale SA in New York, one of the 21 primary dealers that trade with the Fed. “But, until then, we should see more volatility than people think.”

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