Treasuries Rise as Yields at Almost Eight-Month Highs

Treasury 10-year notes rose as yields at almost the highest level since May lured investors into the world’s biggest bond market.

Yields on the benchmark notes earlier advanced to the highest level in a week as demand for Italian bonds at an auction indicated Europe’s debt crisis is easing. Italian 10-year bonds extended a gain, narrowing the yield difference, or spread, over similar-maturity German bunds to less than 250 basis points, or 2.5 percentage points, for the first time since July 22, 2011.

“Guys are not looking to get short at these levels,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “The market tried to test selling-off earlier today -- people are looking to be long.” A short is a bet the price of a security will drop, while a long is a bet the price will rise.

The 10-year yield fell three basis points, or 0.03 percentage point, to 1.87 percent as of 5 p.m. New York time after climbing to 1.93 percent, the highest level since Jan. 4, according to Bloomberg Bond Trader prices. The price of 1.625 percent note due in November 2022 rose 1/4, or $2.50 per $1,000 face value, to 97 27/32.

The yield on the 30-year bond fell three basis points to 3.05 percent.

Yield Curve

The difference between the yields on two-year debt and 10-year notes earlier steepened to 1.67 percentage points, almost the most since May, on optimism the global economic recovery is strengthening, reducing demand for safe-haven assets. It touched 1.69 percentage points on Jan. 4, the widest since May 4.

“We’ve seen a struggle this week in the market between investors where they have flip-flopped on positive-data figures or near-term event risks,” said Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York. “Going into the weekend, there’s still uncertainty tied to various near-term event risks.”

The U.S. sold $66 billion in Treasuries this week, including $32 billion in three-year notes on Jan. 8 at a yield of 0.385 percent, $21 billion in 10-year debt the next day at a yield of 1.863 percent and $13 billion in 3o-year bonds on Jan. 10 at a yield of 3.07 percent.

The sales this week raise $24.4 billion of new cash, as maturing securities held by the public total $41.6 billion, according to the Treasury.

The Treasury will sell two-, five and seven-year securities on three consecutive days starting Jan. 28. The offering sizes will be announced on Jan. 24. It is scheduled to sell 10-year inflation-indexed securities on that day.

‘Inflationary’ Fed

The yield difference between 10-year notes and similar-maturity Treasury Inflation Protected Securities, which represents traders’ outlook for the rate of inflation over the life of the securities, touched 2.54 percentage points today, close to the widest in two months. It touched 2.55 percentage points yesterday, the highest since Nov. 2. The average over the past decade is 2.28 percentage points.

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

“People still expect Fed policy will be inflationary,” said Brian Edmonds, head of interest rates at Cantor Fitzgerald LP in New York, one of 21 primary dealers that trade directly with the Fed. “Most signs in the economy show that it’s stabilizing and may get a bit better although it’s not close to any of the thresholds the FOMC talked about in terms of removing accommodation. We still have a long way to go.”

Unemployment, Inflation

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.

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.

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