Treasuries Pare Gains Before $29 Billion Seven-Year Sale

Treasuries erased gains before Treasury auctions $29 billion of seven-year notes, the last of three sales this week totaling $99 billion.

U.S. debt rose earlier today, extending their first monthly gain since November, as Federal Reserve Chairman Ben S. Bernanke reduced concern the central bank’s monetary stimulus would spark inflation. Benchmark 10-year note yields reached an almost one-month low as Bernanke testified to lawmakers for a second day. U.S. debt was also supported as Congress-mandated $1.2 trillion in across-the-board spending cuts are set to begin March 1.

“Bernanke hasn’t changed his viewpoint, and that means more easing,” said Aaron Kohli, an interest-rate strategist at BNP Paribas SA in New York, one of 21 primary dealers that trade with the Fed. “With the sequestration and all the politics coming that the market has to deal with, we are likely to see a continued grind lower in yield. The economy has gotten better, but there is no evidence yet that the recovery will be self-sustaining.”

The benchmark 10-year yield was little changed at 1.88 percent at 12:39 p.m. New York time, according to Bloomberg Bond Trader prices. The 2 percent note due February 2023 traded at 101 2/32.

The yield fell as much as four basis points and it reached

1.84 percent yesterday, the least since Jan. 24. The yield has dropped 11 basis points since Jan. 31.

Debt Returns

U.S. government debt returned 0.6 percent in February, after sliding 1 percent the previous month, according to Bank of America Merrill Lynch indexes.

The difference between the yields on two-year and 10-year notes, the so-called yield curve, narrowed to 1.64 percentage points, almost the least since Jan. 24. It dropped from a 2013 high of 1.79 percentage points reached on Feb. 4.

The 10-year term premium, a model that includes expectations for interest rates, growth and inflation, reached minus 0.74 percent, 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 was $399 billion yesterday, down from $401.6 billion on Feb. 25, the highest level since Feb. 1, according to ICAP Plc, the largest inter-dealer broker of U.S. government debt. Daily volume has averaged $294 billion this year, compared with $240 billion in 2012.

Fed Policy

The central bank is buying $85 billion of Treasury and mortgage bonds a month to put downward pressure on interest rates. The Fed purchased $5 billion of Treasuries maturing from February 2017 to November 2017 today.

Bernanke’s testimony “reminded people the Fed’s QE program was not ending anytime soon,” said Dan Greenhaus, chief global strategist at the broker-dealer BTIG LLC in New York. “There’s a tremendous amount of demand for U.S. Treasuries. I don’t see any reason today’s auction should be the exception.”

The seven-year notes being sold today yielded 1.26 percent in pre-auction trading, down from 1.416 percent at the previous sale of similar-maturity securities on Jan. 30. That compares with a record-low auction yield of 0.954 percent on July 26.

The U.S. sold $35 billion of five-year securities yesterday and the same amount of two-year debt on Feb. 25.

Treasury 10-year yields will fall to 1.85 percent by the end of March and then climb to 2.31 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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