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Treasuries in Longest Rally Since February on Stimulus Wagers

July 11 (Bloomberg) -- Treasury 10-year notes rose for a fourth day, the longest rally since February, after Federal Reserve Chairman Ben S. Bernanke called for maintaining stimulus amid division among policy makers on when to slow bond buying.

U.S. 30-year bonds erased a gain before the government sells $13 billion of the debt. Benchmark 10-year yields approached the biggest weekly drop in more than a year after Bernanke said yesterday “highly accommodative monetary policy” was needed for the foreseeable future to support the economy. The benchmark yield climbed to the highest level since August 2011 earlier this week on speculation the Fed will scale back purchases.

“Bernanke brought the market back to the realization that tapering may be a little bit more subdued than originally thought,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “There will be good interest in the bond. The concerns on long-term inflation are at a minimum.”

The U.S. 10-year yield fell three basis points, or 0.03 percentage point, to 2.60 percent at 11:44 a.m. in New York, according to Bloomberg Bond Trader prices. The 1.75 percent note maturing in May 2023 advanced 7/32, or $2.19 per $1,000 face amount, to 92 22/32.

The yield has dropped 14 basis points this week, which would be the biggest drop since June 1, 2012. The benchmark note’s last four-day streak of gains ended Feb. 25.

The 10-year note yield will rise to 2.62 percent by year-end, according to the median forecast of 67 economists surveyed by Bloomberg News July 5-10. The figure is up from a median forecast of 2.33 percent in a June 7-12 survey of 78 economists.

Bond Auction

The yield on the current 30-year bond was little changed at 3.66 percent after falling to 3.60 percent, lowest since July 5.

The securities to be sold today yielded 3.66 percent in pre-auction trading. At the previous auction of 30-year bonds on June 13, investors submitted bids for 2.47 times the amount offered, down from 2.53 times in May.

Indirect bidders, the class that includes overseas central banks, purchased 40.2 percent of the bonds at last’s month sale. Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 8.5 percent, the lowest level in three months.

Today’s offering follows auctions of three-year notes on July 9 and 10-year securities yesterday. The U.S. announced it will sell $15 billion in 10-year Treasury Inflation Protected Securities on July 18.

TIPS Returns

TIPS are the worst-performing part of the U.S. government debt market this year, with securities due in 10 years and longer falling 15 percent, according to Bank of America Merrill Lynch indexes. Ten-year notes fell 6.5 percent, the data show.

The Fed purchased $1.38 billion of inflation-indexed debt maturing from January 2025 to February 2043 today as part of its $85 billion monthly purchases of government debt to strengthen the economy.

“Irrespective of a broad consensus for tapering this year, low inflation continues to be something that worries the Fed,” said Michael Markovich, head of global interest-rate strategy at Credit Suisse AG in Zurich.

Bernanke’s comments yesterday, in response to a question after a speech in Cambridge, Massachusetts, were made just three hours after the Fed released the minutes of the June 18-19 meeting.

Fed ‘Applecart’

While about half of the 19 participants in the Federal Open Market Committee wanted to halt the $85 billion in monthly bond purchases by year-end, many said they wanted to see more signs that employment is improving before they’ll begin slowing the bond purchases, according to the minutes.

“The Fed had to do something,” said Michael Franzese, senior vice president of fixed-income trading at ED&F Man Capital Markets in New York. “They didn’t want anything to upset the applecart of the economic gains they have made.”

The Labor Department on July 5 reported the U.S. added 195,000 jobs last month. A Bloomberg News survey had projected 166,000.

U.S. debt remained higher today after the number of Americans filing for unemployment benefits unexpectedly increased to a two-month high last week. First-time jobless claims rose by 16,000 to 360,000 in the week ended July 6 from a revised 344,000, Labor Department figures showed today in Washington. The median forecast of 47 economists surveyed by Bloomberg called for a drop to 340,000.

The Fed has kept its target for overnight bank lending in a range of zero to 0.25 percent since December 2008. It has said it will consider raising the target when the unemployment rate falls to 6.5 percent, versus 7.6 percent as of June.

Thirty-day federal funds futures contracts for delivery in April 2015 yielded 0.52 percent, indicating investors expect the Fed target to be higher by then. As recently as July 5, the securities for delivery in February 2015 were indicating an increase in the Fed target. The contract settles at the average overnight fed funds rate for the delivery month.

To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net

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

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