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Treasuries Little Changed Before $35 Billion Five-Year Auction

Treasuries were little changed before the U.S. sells $35 billion of five-year debt today, the second of three note auctions this week totaling $97 billion.

Volatility in Treasuries as measured by the Bank of America Merrill Lynch MOVE index dropped for a 10th day yesterday, reaching 74.82 basis points, the lowest level since Aug. 12. The average over the past year is 68.66. Price swings are narrowing after the Federal Reserve unexpectedly decided to maintain its monthly bond purchases at a meeting last week. A Bloomberg News survey of economists predicts the central bank will start reducing them in December.

“We will not purchase at the current level,” said Yoshiyuki Suzuki, who helps oversee the equivalent of $57.6 billion as head of fixed-income at Fukoku Mutual Life Insurance Co. in Tokyo. “The Fed will taper this year. Yields will go up to 3 percent.” Ten-year yields climbed to 3.01 percent earlier this month ahead of last week’s Fed meeting, with Suzuki calling it a “drill” for when policy makers eventually cut purchases.

The benchmark U.S. 10-year yield was at 2.65 percent at 8:38 a.m. in London, according to Bloomberg Bond Trader data. The price of the 2.5 percent note due August 2023 was 98 3/4.

The Bloomberg U.S. Treasury Bond Index has fallen 0.1 percent since the end of June, heading for a fourth quarterly decline. It has climbed 0.8 percent in September, leaving it down 2.5 percent for 2013.

Fed Stimulus

The U.S. central bank buys $85 billion of Treasury and mortgage debt a month to support the economy by putting downward pressure on borrowing costs. It refrained from reducing the purchases after its Sept. 17-18 meeting, saying it needs more evidence of lasting improvement in the economy.

Treasuries rose yesterday amid mixed economic data. The Conference Board’s index of U.S. consumer confidence fell to 79.7 in September from a revised 81.8 a month earlier. S&P/Case-Shiller said property values in 20 cities rose 12.39 percent in July from a year earlier, the biggest gain since February 2006.

Government figures today will show new-home sales and durable-goods orders excluding volatile transportation equipment rose in August, based on Bloomberg News survey of economists.

Twenty-four of 41 economists surveyed by Bloomberg on Sept. 18-19 said the Fed won’t take the first step in slowing its bond purchases until December.

Closed Bet

Yields are more likely to fall than increase, said Park Sungjin, who oversees $7 billion as head of asset management at Meritz Securities Co. in Seoul. He closed a bet on Treasuries dropping earlier this month, he said.

“There isn’t much reason for yields to rise,” Park said. “Market participants aren’t as focused on tapering as before.”

Ten-year yields will be between 2.50 and 2.70 percent for the next few months, said Jens Nordvig, managing director of currency research at Nomura Holdings Inc., Japan’s biggest brokerage.

“The housing market in the U.S. has been this source of persistent strength throughout most of this year, and it’s looking like the higher borrowing cost for mortgages is starting to have some kind of impact,” he said in an interview at a conference in Singapore.

Mortgage Costs

The average cost on 30-year fixed-rate mortgages dropped to a record low of 3.31 percent in November and has since risen to 4.50 percent, according to Freddie Mac. Building permits, a gauge of future construction, fell in August, the Commerce Department said Sept. 18.

The previous sale of five-year notes on Aug. 28 drew bids for 2.38 times the amount of notes offered, down from 2.46 times in July.

A $33 billion sale of Treasury two-year notes yesterday drew a yield of 0.348 percent, less than the forecast of 0.354 percent in a Bloomberg survey of seven of the Fed’s 21 primary dealers. Investors bid for 3.09 times the amount of securities available, versus 3.21 in August.

The U.S. is also scheduled to sell $29 billion of seven-year notes tomorrow.

The sales this week, along with last week’s $13 billion 10-year auction of Treasury Inflation Protected Securities, will raise $47.6 billion of new cash, as maturing securities held by the public total $62.3 billion, according to the Treasury.

The market for U.S. government debt has yet to react to any potential impasse over raising the borrowing ceiling. Most federal operations would come to a halt when the fiscal year ends Sept. 30 if President Barack Obama’s administration and lawmakers can’t agree on a funding plan.

Treasury Secretary Jacob J. Lew said yesterday investor confidence that a deal can be struck to raise the debt limit is “a bit greater than it should be” and the government probably will have less than $50 billion in cash by mid-October.

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