Treasury Yields at Almost Four-Month Lows Before Auctions

Treasury 10-year note yields traded at almost the lowest level this year as the U.S. prepared to sell $35 billion in two-year debt tomorrow, the first of three note auctions this week totaling $99 billion.

Treasury volatility as measured by Bank of America Merrill Lynch’s MOVE index fell to a record 50.58 basis points, below the previous record of 51 basis points reached in December. Benchmark yields remained under the 200-day moving average for a seventh day as sales of previously owned U.S. homes unexpectedly dropped in March, showing uneven progress in the industry. Yields climbed earlier after the re-election of Italy’s president boosted speculation he will help resolve political gridlock.

The auctions “won’t disturb the current fabric of the market,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee. “Only a series of positive economic data will do that. There will be acceptable demand.”

The benchmark U.S. 10-year yield declined one basis point, or 0.01 percentage point, to 1.69 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices, below its 200-day moving average of 1.75 percent. It touched 1.67 percent on April 17, the least since Dec. 12. The 2 percent note due in February 2023 fell 3/32, or 94 cents per $1,000 face value, to 102 3/4. The 30-year bond yield fell one basis point to 2.88 percent.

“We’ve got to test the lows before we really get a conviction as to what’s going to happen,” Vogel said. “Otherwise, we’re just in a range of 1.63 to 1.85 percent.”

The U.S. is scheduled to sell $35 billion in five-year notes on April 24 and $29 billion in seven-year debt the next day.

Treasury Demand

Bidding has slowed at Treasury auctions this year, with the $632 billion in debt sales attracting an average of $2.95 in bids per dollar of debt sold, compared with $3.15 last year, data released by the Treasury and compiled by Bloomberg shows.

That is the fewest bids since 2009, when the Treasury attracted 2.50 times the amount of bids relative to the debt on offer. The ratio of bids to debt sold has set records in each of the past three years reaching 2.99 times in 2010, 3.04 times in 2011 before setting the new mark this year.

Treasuries returned 0.9 percent this month through April 19, according to Bank of America Merrill Lynch indexes. German government bonds gained 0.1 percent, the indexes show.

“There seems to be demand for Treasuries, even with these low yields,” said Brian Edmonds, head of interest rates in New York at Cantor Fitzgerald LP, one of 21 primary dealers that trade with the Federal Reserve.

Fed Buying

The Fed purchased $3.73 billion of securities maturing between January 2019 and March 2020 today as part of its monetary-stimulus program known as quantitative easing. Chairman Ben S. Bernanke has pumped more than $2.5 trillion into the economy to fulfill the central bank’s twin mandates of full employment and price stability.

Wall Street’s biggest bond dealers see little chance the Fed will slow the pace of debt purchases designed to boost economic growth before year-end, even as policy makers face calls to curb the buying.

Of the Fed’s primary dealers, 14 said in a Bloomberg survey that the central bank won’t start to reduce its $85 billion monthly bond buying until the last three months of 2013. Twelve forecast they will end in mid-2014 or later. Fifteen say it will take until at least June 2015 for policy makers to raise the record low benchmark interest-rate target of zero to 0.25 percent.

‘Too Early’

“It’s still too early” to end the bond buying, Rajiv Setia, head of U.S. interest-rate research at Barclays Plc in New York, a primary dealer, said in an April 19 telephone interview. “This is the only tool they have. They’re doing all they can. At the end of the day, the benefits outweigh any risks of a bubble for now.”

Barclays forecasts the Fed will slow its pace of purchases in the first three months of 2014 and end them by June next year.

Purchases of U.S. previously owned houses, tabulated when a contract closes, fell 0.6 percent to a 4.92 million annual rate last month, figures from the National Association of Realtors showed today in Washington. The median forecast of 75 economists surveyed by Bloomberg projected sales would increase to a 5 million rate.

Italy’s Giorgio Napolitano, 87, was sworn in for a second seven-year term today in Rome and may begin consultations on a new government as soon as tomorrow. He was re-elected on April 20 after the country’s divided parliament failed to agree on a candidate in the first five rounds of voting, an impasse that led Democratic Party leader Pier Luigi Bersani to resign.

Italy’s two-year note yield fell 10 basis points to 1.23 percent after dropping to 1.208 percent, the lowest level since Bloomberg began compiling data on the securities in 1993.

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