Treasury 10-Year Yield at Lowest This Year on Fed, Auction Sizes

Treasury 10-year yields traded at the lowest level this year on bets the Federal Reserve will affirm its commitment to the pace of bond purchases to support growth and as the U.S. said it may reduce debt-auction sizes.

Benchmark 10-year notes gained as a private report showed employers added fewer jobs than forecast last month. Treasuries capped a third monthly gain yesterday on signs the U.S. economic recovery is losing momentum, reinforcing speculation the Fed won’t scale back unprecedented monetary stimulus, known as quantitative easing, or QE, following a two-day meeting ending today. The Treasury said it may decide to “gradually” cut coupon auction sizes as deficits decline and plans a floating-rate note sale as early as the fourth quarter.

“Cutting and tapering QE is not going to be in the cards for quite some time,” said Justin Lederer, an interest-rate strategist in New York at Cantor Fitzgerald LP, one of 21 primary dealers that trade with the Fed. “Data continues to be weak. Part of issuing floaters was the expectation that shorter maturities may be cut a little bit. I would be surprised to see longer maturities cut in size.”

The benchmark 10-year yield declined six basis points, or 0.06 percentage point, to 1.62 percent at 11:23 a.m. in New York, reaching the lowest level since Dec. 11, according to Bloomberg Bond Trader prices. The 2 percent note maturing in February 2023 added 1/2, or $5 per $1,000 face amount, to 103 15/32.

Treasury Auctions

The U.S. will sell $32 billion in three-year notes, $24 billion in 10-year debt and $16 billion in 30-year bonds on three consecutive days starting May 7, the Treasury announced.

The Treasury said it may gradually decrease coupon auction sizes and estimated the first floating rate auction will be held in the fourth quarter this year or in the first quarter of 2014.

The U.S. budget deficit will drop to $476 billion in 2016 from a record $1.4 trillion in 2009, according to data from the Congressional Budget Office. The federal government will post an $845 billion deficit this year, the first time in five years that the shortfall has been less than $1 trillion, according to the CBO.

“We’ve expected the gradual decrease in deficits as time progresses,” said Lederer of Cantor Fitzgerald said. “It will be smaller going forward.”

Floating Notes

Treasury said a final rule on the floating-rate note auction is planned for coming months, with a first sale estimated to occur either in the fourth quarter this year or the first quarter of 2014. The department said it will use the weekly high rate of 13-week Treasury bill auctions as the index for the notes.

“Less supply would give the Fed a greater portion of what’s out there, which in effect would step up the power of their purchases,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors.

U.S. government securities returned 1.1 percent in April, according to Bank of America Merrill Lynch indexes. The Standard & Poor’s 500 Index of shares gained 1.9 percent including reinvested dividends, data compiled by Bloomberg show.

Bank of America Merrill Lynch’s MOVE index measuring price swings in Treasuries fell to an all-time low of 49.24 yesterday.

Economic Data

The ADP Employer Services report showed that employers added 119,000 jobs last month, compared with a forecast of 150,000 jobs in a Bloomberg News survey of economists.

U.S. gross domestic product grew less than economists forecast in the first quarter, the Commerce Department said April 26. Business activity in the U.S. unexpectedly shrank in April for the first time in more than three years, the MNI Chicago Report said yesterday.

The Federal Open Market Committee plans to release a statement at 2 p.m. after a meeting in Washington. None of the 47 economists in a Bloomberg survey taken April 25-29 expects a decision at this week’s meeting to change the pace of its asset purchases.

“Over the past two months, we’ve started to see economic data slow down,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “It’s full speed ahead on QE.”

The Fed is buying $85 billion of bonds each month to put downward pressure on borrowing costs. While Chairman Ben S. Bernanke said after the previous meeting on March 20 that further labor-market gains were needed to consider reducing monetary easing, minutes showed several officials discussed slowing the pace of buying.

The central bank plans to purchase $44 billion in Treasuries this month, just below the $45 billion monthly target given that it purchased about $46 billion of the securities in April. The Fed spent $2.3 trillion on Treasury and mortgage-related debt from 2008 to 2011 in the first two rounds of its stimulus policy known as quantitative easing.

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