Treasuries Gain for First Month Since November on Fed

Treasury 10-year notes gained for the first month since November as investors sought safety amid turmoil in Europe and the Federal Reserve reinforced its commitment to buying government debt to support the economy.

The 10-year yield fell the most in a month since July as investors bet the start of $85 billion in automatic federal spending cuts tomorrow will hurt the U.S. economic recovery, boosting the case for monetary stimulus. Bonds rose today as data showed the economy grew less than forecast in the fourth quarter. Japan overtook China last year as the largest foreign holder of U.S. securities, the Treasury Department said. Fed Chairman Ben S. Bernanke told lawmakers this week a premature interest-rate increase would snuff out the recovery.

“Bernanke’s testimony this week emboldened the market that rates will be low for a considerable period of time,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “He’s doing everything in his power to keep rates low.”

The 10-year yield fell three basis points, or 0.03 percentage point, to 1.88 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices, below its 50-day moving average of 1.89 percent. The yield touched 1.84 percent on Feb. 26, the lowest level since Jan. 24. The price of the 2 percent security due in February 2023 rose 7/32, or $2.19 per $1,000 face amount, to 101 1/8.

The yield dropped 11 basis points in February.

The Fed’s benchmark interest-rate target has been zero to 0.25 percent since 2008 to support the economy.

Italian Elections

U.S. debt was also supported by month-end buying to match market indexes. Funds that manage portfolios against benchmark indexes, including the Barclays U.S. Aggregate Index, typically buy longer-maturity Treasuries near month-end to align the interest-rate sensitivity of their holdings with the indexes.

The Barclays index, which many funds use to measure their performance, will extend its duration, the measure of rate-sensitivity, by 0.11 year on March 1.

Ten-year yields have fallen nine basis points this week, the second straight five-day decrease, after Italian parliamentary elections Feb. 24-25 failed to give any party a clear majority. That cast doubt on the stability of the next government and spurred bets the country’s commitment to austerity may be diluted, worsening Europe’s debt crisis.

“The reason we popped out of the hole was because of the Italian elections,” Mitsubishi UFJ’s Roth said.

Yield Curve

The difference between the yields on two-year and 10-year notes, called the yield curve, narrowed to 1.64 percentage points, approaching the 1.63 percentage-point level reached Feb. 25, the smallest on a closing basis since Jan. 24. It dropped from a 2013 high of 1.76 percentage points reached on Feb. 19.

Treasuries have returned 0.5 percent this month as of yesterday, after losing 1 percent in January, according to Bank of America Merrill Lynch indexes. They have declined 0.4 percent this year. German bonds gained 1.3 percent in February.

The 10-year term premium, a model that includes expectations for interest rates, growth and inflation, reached negative 0.73 percent, almost the most costly since Jan. 23. A negative reading indicates investors are willing to accept yields below what’s considered fair value.

Bernanke signaled in congressional testimony this week the Fed is prepared to keep buying bonds at its present pace as he dismissed concerns record easing risks sparking inflation or fueling asset price bubbles. He told lawmakers the central bank’s policies are helping to improve demand for homes and cars by lowering long-term interest rates.

Monthly Purchases

The Fed is purchasing $85 billion of Treasury and mortgage-backed securities each month in an effort to spur the economy and cut a jobless rate that was 7.9 percent in January.

The bank bought $1.45 billion today of debt maturing from February 2036 up to August 2042. It said it will purchase $45 billion of Treasuries in March, including as much as $1 billion tomorrow of bonds due from August 2023 to February 2031.

The automatic U.S. spending cuts set to go into effect tomorrow unless Congress heads them off, which total $1.2 trillion over nine years, may lower gross domestic product by 0.6 percentage point and cost 750,000 jobs by the end of 2013, according to the Congressional Budget Office.

Far Apart

Treasuries rose today as revised data from the Commerce Department showed U.S. gross domestic product grew at a 0.1 percent annual rate from October through December, up from a previously estimated 0.1 percent drop. The median forecast of 83 economists surveyed by Bloomberg called for a 0.5 percent gain.

The advance was tempered as investor risk appetite improved after the MNI Chicago Report gauge of U.S. business rose to 56.8 this month, the highest level since March. Initial claims for jobless benefits in the U.S. decreased by 22,000 to 344,000 last week, the Labor Department said.

Japan’s total holdings of U.S. securities grew to $1.84 trillion at the end of June 2012, from $1.59 trillion a year earlier. China’s holdings fell to $1.59 trillion from $1.73 trillion, Treasury said today in a preliminary report.

The Treasury said a preliminary report of U.S. holdings of foreign securities is expected to be released by Aug. 30.

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