Treasury 10-Year Yields Near 8-Month Highs Before Auction

Treasury 10-year note yields traded close to the highest level since April before the first auction of the securities this year after the Federal Reserve announced plans to buy more debt each month to sustain the U.S. economic recovery.

The yield on the benchmark note was little changed as the $21 billion of the securities the government is selling drew a pre-auction yield of 1.88 percent, which would be the highest since April. It is the second of three debt sales this week totaling $66 billion. Treasuries fell on Dec. 12, the date of the previous 10-year auction, as the central bank announced it would purchase $85 billion of government and mortgage debt a month.

“The sentiment last week was that yields would move higher quickly, but that has reversed,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “The auctions continue to be well received. Coming out of these auctions long with the anticipation of the Fed buying as much paper as it will might be on people’s minds.” A long is a bet the price of a security will rise.

Ten-year notes yielded 1.87 percent at 11:39 a.m. New York time, based on Bloomberg Bond Trader prices. The yield last week jumped 20 basis points, or 0.2 percentage point, touching 1.97 percent on Jan. 4, the highest since April 26. The price of the 1.625 percent note maturing in November 2022 was 97 26/32.

The 30-year yield was little changed at 3.07 percent after reaching 3.18 percent on Jan. 4, highest since April 25.

Previous Sale

At the December auction of the 10-year securities, investors bid for 2.95 times the amount of debt offered, compared with 2.59 times in November. The notes drew a yield of 1.65 percent, compared with a record-low auction yield of 1.459 percent on July 11.

Direct bidders purchased 42.7 percent, the most since 45.4 percent in July, which was a record. Indirect bidders, the investor class that includes foreign central banks, bought 24.2 percent of the notes, the least since April 2009.

“There’s still ample demand,” said Justin Lederer, an interest-rate strategist in New York at Cantor Fitzgerald LP, one of 21 primary dealers that trade with the Fed. “Treasuries erased a lot of the losses from last week. Expectations for rates to go significantly higher” have not been realized.

Direct Bidders

A $32 billion auction of three-year notes yesterday drew a yield of 0.385 percent, compared with a forecast of 0.387 percent in a Bloomberg News survey of five of the Fed’s primary dealers. Direct bidders purchased 26.4 percent of the notes at the sale, topping the previous mark of 24.8 percent set in December and the average of 14.2 percent for the past 10 auctions.

The Treasury is scheduled to conclude this week’s auctions with a $13 billion sale of 30-year bonds tomorrow.

The difference between the yields on two-year notes and 10-year securities, the so-called yield curve, narrowed to 1.61 percentage points, after touching 1.69 percentage points on Jan. 4, the widest since May.

The so-called yield curve typically narrows when investors anticipate a slow economic recovery because they demand less compensation for the risk of inflation.

Fed Bank of Richmond President Jeffrey Lacker said yesterday the central bank’s record easing measures risk fueling inflation after this year.

Volume Drops

“I intend to remain alert for signs that our monetary policy stance needs adjustment,” Lacker said in a speech in Columbia, South Carolina. He does not vote on monetary policy this year or next.

The Fed purchased $2.3 billion of mortgage and Treasury debt in two separate rounds of asset purchases from 2008 to 2011 intended to stimulate the economy, known as quantitative easing. It bought $1.546 billion of Treasuries due from February 2036 to November 2042 today as part of its outright purchase program.

The difference between yields on 10-year notes and same-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, was 2.50 percentage points, compared with an average over the past decade of 2.19 percentage points.

Treasury volume was $279 billion yesterday after touching the most in almost four months last week, according to ICAP Plc, the largest inter-dealer broker of U.S. government debt. Volume rose Jan. 4 to $404 billion, the most since Sept. 13. Daily volume averaged $239 billion in 2012.

Treasuries have handed investors a 0.6 percent loss this year through yesterday, according to Bank of America Merrill Lynch indexes. They returned 2.2 percent in 2012, the smallest annual return since 2009.

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