Treasury Yields Close to 1-Month Low Before Auction

Treasury 10-year note yields traded at almost the lowest level in a month as the U.S. prepares to sell $35 billion of five-year securities in the second of three auctions this week totaling $99 billion.

U.S. debt was little changed as Federal Reserve Chairman Ben S. Bernanke defended the central bank’s unprecedented asset purchases during congressional testimony, saying they are supporting the expansion with little risk of inflation or asset-price bubbles. Benchmark 10-year notes rallied the most since November yesterday as investors sought the safety after inconclusive elections in Italy triggered concern Europe’s debt crisis would intensify.

“The focus today is on Bernanke, who is staying the course despite the division at Federal Open Market Committee meetings, and what is going on in Italy, which has yet to play out, said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “Both stories have given some support to the Treasury market. People were waiting to see what Bernanke had to say after the last two FOMC meetings showed some divisiveness among the committee members.”

The 10-year yield fell one basis point, or 0.01 percentage point, to 1.85 percent as of 11:36 a.m. New York time, according to Bloomberg Bond Trader prices. The yield dropped to 1.84 percent, the lowest since Jan. 24. The price of the 2 percent note maturing in February 2023 added 3/32, or 94 cents per $1,000 face amount, to 101 10/32.

Debt Returns

Treasuries of all maturities have returned 0.5 percent this month, while losing 0.4 percent this year, according to Bank of America Merrill Lynch indexes. U.S. debt returned 2.2 percent in 2012.

The 10-year term premium, a model that includes expectations for interest rates, growth and inflation, reached negative 0.7 percent today, the most costly level since Jan. 23. A negative reading indicates investors are willing to accept yields below what’s considered fair value.

Treasury trading volume rose yesterday to $401.6 billion, the highest level since Feb. 1, according to ICAP Plc, the largest inter-dealer broker of U.S. government debt. Daily volume has averaged $292.5 billion this year, compared with $240 billion in 2012.

The five-year notes scheduled for sale today yielded 0.77 percent in pre-auction trading, compared with 0.889 percent at the previous auction of the securities on Jan. 29.

Investors bid for 2.88 times the amount of available debt last month, compared with 2.72 times in December.

Auction Outlook

The five-year auction “is going to go very well,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee. “Bonds are going to be so glued to figuring out what positions have to be rebalanced globally. We have to re-plow an awful lot of ground that people think was behind us.”

The U.S. is scheduled to auction $29 billion of seven-year notes tomorrow. A $35 billion two-year sale yesterday drew purchase orders for 3.33 times the amount offered, the lowest level in 19 months.

U.S. 10-year yields dropped as much as 11 basis points yesterday, the biggest intraday slide since Nov. 7, after Italian results showed pre-election favorite Pier Luigi Bersani won the lower house by less than a half a percentage point, while Silvio Berlusconi, the former premier fighting a tax-fraud conviction, won a blocking minority in the Senate.

U.S. five-, 10-, and 30-year yields all slid to month lows earlier today amid speculation spending cuts set to begin March 1 will hurt the world’s largest economy. President Barack Obama urged U.S. governors to pressure Congress for a deal to avoid the reductions, telling them yesterday the impact would be felt in every state.

Budget Cuts

Congress mandated $1.2 trillion in across-the-board spending cuts to begin this year and be spread over nine years as part of a 2011 deal to increase the U.S. debt limit. The reductions, also known as sequestration, are to be split almost evenly between defense and nondefense spending.

“The result of the Italian election and the approaching sequester deadline should bring back a bid to longer-dated paper,” Lloyds Banking Group Plc strategists led by Charles Diebel in London wrote in an e-mailed note.

Reports showed consumer confidence was stronger than forecast this month and new home sales reached the highest level since July 2008.

The Conference Board’s index climbed to 69.6, exceeding all forecasts in a Bloomberg survey of economists, from a revised 58.4 in January, data from the New York-based private research group showed today.

New home sales surged 15.6 percent to a 437,000 annual pace, exceeding the highest forecast in a Bloomberg survey and following a 378,000 rate in the prior month, figures from the Commerce Department showed today in Washington.

Fed Policy

Fed policy makers cut their target for the federal funds rate, which banks charge each other for overnight loans, to a range of zero to 0.25 percent in 2008. In January, they affirmed their pledge to keep the target near zero “at least as long” as unemployment remains above 6.5 percent and inflation is projected to be no more than 2.5 percent.

The central bank is also buying $85 billion of Treasury and mortgage bonds a month to put downward pressure on interest rates. The Fed bought $1.4 billion of Treasuries maturing from February 2036 to August 2042 today.

Fed Chairman Bernanke is scheduled to testify before a U.S. House committee tomorrow.