Treasuries Gain on Japan Speculation Before 3-Year Sale

Treasuries advanced on speculation the Bank of Japan’s plan to double its asset purchases may boost buying at today’s $32 billion three-year note auction.

Yields on benchmark 10-year securities dropped to almost the lowest level since December before the Treasury sells $66 billion of note an bonds at three auctions this week. The yields traded below 2 percent for the third straight week as Federal Reserve Chairman Ben S. Bernanke signaled in a speech yesterday that there was room for improvement in the economy, spurring bets the central bank will maintain asset purchases.

“It would be appropriate for Japanese investors to be looking at U.S. Treasuries, given where the Japanese government-bond market is,” said Thomas di Galoma, a managing director at Navigate Advisors, a brokerage for institutional investors in Stamford, Connecticut. “Maybe they are waiting for the auction process to be able to buy in greater quantities. I wouldn’t be surprised to see a pretty substantial indirect bid.”

The U.S. 10-year note yield declined one basis point, or 0.01 percentage point, to 1.73 percent as of 12:01 p.m. in New York, according to Bloomberg Bond Trader prices. The price of the 2 percent security due in February 2023 fell 3/32, or 94 cents per $1,000 face value, to 102 13/32. The yield dropped to 1.68 percent on April 5, the lowest level since Dec. 12.

The difference between the yield on the 10-year note and the 30-year bond was 1.18 percentage points today after narrowing on April 5 to 1.16 percentage points, the lowest since November.

Note Auction

“We could push through 1.68 percent if the expectations of Japan buying are correct and it trickles into the U.S,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors.

The three-year notes being sold today yielded 0.34 percent in pre-auction trading, compared with 0.41 percent at the previous offering on March 12. The U.S. will sell $21 billion of 10-year securities tomorrow and $13 billion of 30-year bonds on April 11.

The yield on previously issued three-year notes was 0.33 percent after dropping to 0.30 percent on April 5, the lowest since Oct. 4.

Japan Buying

Treasuries have returned 0.6 percent this year, including a 0.8 percent gain in April, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Treasuries are set for a third month of gains, the longest stretch since January 2012, according to the Bank of America Merrill Lynch’s U.S. Treasury Index.

German bunds gained 1 percent and U.K. gilts rose 1.9 percent this year.

The MSCI All-Country World Index advanced 0.4 percent while the Standard & Poor’s 500 Index rose 0.2 percent after a 0.9 percent gain yesterday. The dollar declined against the euro and the yen.

New Bank of Japan Governor Haruhiko Kuroda said April 4 the central bank would double its monthly asset purchases in a bid to encourage inflation. Japan held $1.12 trillion of U.S. Treasury debt, Treasury data through January shows.

“Everybody’s waiting to see what’s going to happen as Japan continues to do QE,” said Michael Franzese, senior vice president of fixed-income trading at ED&F Man Capital Markets in New York. “They are searching for yield. The most secure thing they can go into right now are Treasuries.”

The yield on the 10-year Japanese note was 0.52 percent today, according to Bloomberg data.

Fed Purchases

“Today the economy is significantly stronger than it was four years ago, although conditions are clearly still far from where we would all like them to be,” Bernanke said in a speech in Stone Mountain, Georgia.

The Fed is buying government and mortgage debt at a rate of $85 billion a month in a bid to boost expansion and reduce unemployment. The central bank purchased $1.57 billion of securities due between February 2037 and February 2043 today, according to the New York Fed’s website.

Bernanke said last month further improvements in employment are needed for the central bank to consider reducing its record monetary easing.

The Labor Department will say on Thursday that claims for jobless benefits dropped to 360,000 in the week ended April 6, according to the median estimate in a Bloomberg News survey of economists. Applications reached 385,000 in the period through March 30, the most in almost four months.

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