Treasuries Gain on Italy’s Election Before Note Sale

Treasuries rose, pushing yields below 2 percent for a third day, as polls indicated the euro area’s third-largest economy, Italy, may be left with a hung parliament, stoking refuge demand.

U.S. debt fell earlier today before the U.S. sells $99 billion of notes this week starting with $35 billion of two-year securities today. Preliminary results from Italian elections show former Prime Minister Silvio Berlusconi may have built a blocking minority in the Senate to deny outright victory to opponent Pier Luigi Bersani. Federal Reserve Chairman Ben S. Bernanke testifies before lawmakers tomorrow and the following day.

“The concern is that Berlusconi will take off the austerity measures,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “It’s not set in stone, but it’s brought in heavy buying.”

The benchmark 10-year yield dropped three basis points, or 0.03 percentage point, to 1.93 percent at 12:04 a.m. New York time, according to Bloomberg Bond Trader prices. The 2 percent note maturing in February 2023 added 9/32, or $2.81 per $1,000 face amount, to 100 20/32.

Two-year notes yielded 0.25 percent, matching the upper end of the Fed’s target range for overnight loans between banks.

Auction Data

Treasuries handed investors a loss of 0.8 percent this year through Feb. 22 after accounting for interest payments, according to Bank of America Merrill Lynch indexes. The MSCI All-Country World Index of shares returned 4.4 percent.

The securities being sold today yielded 0.26 percent in pre-auction trading. The U.S. is also due to auction $35 billion of five-year debt tomorrow and $29 billion of seven-year notes on Feb. 27.

Indirect bidders, the investor class that includes foreign central banks, purchased 18 percent of the notes at the previous two-year auction on Jan. 28. The average for the prior 10 sales was 30 percent. Direct bidders, non-primary dealer investors that place their orders with the Treasury, purchased 30 percent.

Bernanke’s two-day testimony, known as Humphrey-Hawkins for the legislation that established the semi-annual appearances, begins tomorrow at 10 a.m. in the Senate and continues Feb. 27 in the House.

Fed Buys

The Fed is purchasing up to $85 billion of Treasuries and mortgage-backed securities a month, a policy known as quantitative easing, or QE. Bernanke and his colleagues on the Federal Open Market Committee have pledged to continue buying bonds until the labor market improves “substantially.” Unemployment was 7.9 percent in January.

“There has been a lot ink spilled on this, but it’s worth remembering that even if the Fed stops QE at the end of this year, that’s still $1 trillion worth of balance-sheet growth,” said Michael Cloherty, head of U.S. interest rate strategist at Royal Bank of Canada’s RBC Capital Markets unit in New York, on Bloomberg Radio’s “Surveillance” with Tom Keene, Sara Eisen and Michael McKee. “It’s not exactly going easily into the night.”

The central bank bought $3.3 billion Treasuries maturing from May 2020 to February 2023.

Demand for the safest securities was damped earlier as economists said U.S. reports this week will show sales of new homes increased in January and consumer confidence improved this month.

Sales of new homes in the U.S. rose 3 percent in January to a 380,000 annual rate, according to the median prediction of 61 economists surveyed by Bloomberg before the Commerce Department releases the data tomorrow. Confidence among consumers increased in February from its lowest level in 14 months, the New York-based Conference Board will say tomorrow, according to a separate Bloomberg survey.

Treasury 10-year yields will fall to 1.86 percent by the end of March and then climb to 2.30 percent by Dec. 31, based on a Bloomberg survey of financial companies with the most recent projections given the heaviest weightings.

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