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Treasury 10-Year Yield Sets 2013 Low as Fed Maintains Stimulus

May 1 (Bloomberg) -- Treasury 10-year yields reached the lowest this year as the Federal Reserve reiterated its commitment to asset purchases to spur economic growth, spurring demand for the securities.

Benchmark 10-year notes rallied as the central bank said it will maintain its bond-buying at a pace of $85 billion a month and is prepared to raise or lower the level of purchases as economic conditions evolve. The Fed has held its target for the federal funds rate at zero to 0.25 percent since December 2008. U.S. debt yields fell earlier today as the U.S. said it may reduce debt-auction sizes and a private report showed employers added fewer jobs than forecast last month.

“Given the weaker data in the U.S. and globally, they want to keep their foot on the pedal and maybe press down a little bit,” said Jason Brady, a fund manager who helps oversee about $89 billion in assets at Thornburg Investment Management Inc. in Santa Fe, New Mexico. “The Treasury market has its backstop. The Fed continues to believe that very low rates are key to the achievement of their objectives.”

The benchmark 10-year yield declined four basis points, or 0.04 percentage point, to 1.63 percent at 4:59 p.m. in New York, after reaching the lowest level since Dec. 11, according to Bloomberg Bond Trader prices. The 2 percent note maturing in February 2023 added 3/8, or $3.75 per $1,000 face amount, to 103 11/32.

Relative Value

Treasuries due in a decade or more have been trading at more expensive levels relative to global peers with comparable maturities, according to Bank of America Merrill Lynch indexes. Yields on Treasuries dropped to 42 basis points higher than those in an index of other sovereign debt yesterday. As recently as March 25, the gap was at 57 basis points, the cheapest levels since August 2011, the data showed.

The U.S. will sell $32 billion in three-year notes, $24 billion in 10-year debt and $16 billion in 30-year bonds on three consecutive days starting May 7, the Treasury announced.

The Treasury said it may gradually decrease coupon auction sizes and estimated the first floating-rate auction will be held in the fourth quarter this year or in the first quarter of 2014.

The U.S. budget deficit will drop to $476 billion in 2016 from a record $1.4 trillion in 2009, according to data from the Congressional Budget Office. The federal government will post an $845 billion deficit this year, the first time in five years that the shortfall has been less than $1 trillion, according to the CBO.

Budget Shift

“We’ve expected the gradual decrease in deficits as time progresses,” said Justin Lederer, an interest-rate strategist in New York at Cantor Fitzgerald LP. “It will be smaller going forward.”

Treasury said a final rule on the floating-rate note auction is planned for coming months, with a first sale estimated to occur either in the fourth quarter this year or the first quarter of 2014. The department said it will use the weekly high rate of 13-week Treasury bill auctions as the index for the notes.

“Less supply would give the Fed a greater portion of what’s out there, which in effect would step up the power of their purchases,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors.

The central bank spent $2.3 trillion purchasing Treasury and mortgage-related debt from 2008 to 2011 in the first two rounds of quantitative easing. The Fed buying this year has been divided between $40 billion a month of mortgage-backed securities and $45 billion a month of Treasury securities.

Economic Trend

Backers of Fed stimulus point to a sluggish economy. Unemployment was 7.6 percent in March as payrolls grew by 88,000, the least in nine months, according to Labor Department data released April 5. Retail sales fell in March by 0.4 percent, the biggest drop since June, the Commerce Department said April 12.

“The committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes,” the Federal Open Market Committee said today at the conclusion of a two-day meeting in Washington.

The ADP Employer Services report showed that employers added 119,000 jobs last month, compared with a forecast of 150,000 jobs in a Bloomberg News survey of economists. The Institute for Supply Management’s factory index fell to 50.7 from the prior period’s 51.3, the Tempe, Arizona-based group said today. Fifty is the dividing line between growth and contraction.

Fed Policy

“The Fed wanted to make tapering the crux of their policy, but fiscal headwinds and slowing economy have taken over,” said David Robin, an interest-rate strategist in New York at Newedge USA LLC, an institutional- brokerage firm. “As strongly as they desire to taper, they just can’t.

Bank of America Merrill Lynch’s MOVE index measuring price swings in Treasuries fell to an all-time low of 49.24 yesterday.

U.S. government securities returned 1.1 percent in April, according to Bank of America Merrill Lynch indexes. The Standard & Poor’s 500 Index of shares gained 1.9 percent including reinvested dividends, data compiled by Bloomberg show.

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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