Treasuries Gain Most Three Months as Tapering Talk Seen Overdone

Treasuries gained the most in more than three months as traders said speculation that the Federal Reserve could disclose plans to slow its bond-buying program as soon as at next week’s policy meeting was overblown.

Yields on benchmark 10-year notes fell for the first time in three days. Fed Chairman Ben S. Bernanke has repeatedly said a reduction in the central bank’s $85 billion in monthly bond purchases wouldn’t mean an end to record easing. Ten-year notes have dropped the past six weeks, the longest losing stretch since 2009.

“The market could have overreacted to tapering, and this brings us back to solid ground,” said Justin Lederer, an interest-rate strategist at Cantor Fitzgerald LP in New York, one of 21 primary dealers that were required to bid at today’s $13 billion 30-year bond auction.

U.S. 10-year yields slid eight basis points, or 0.08 percentage point, to 2.15 percent at 5 p.m. New York time, according to Bloomberg Bond Trader data. The drop is the largest since Feb. 25. The price of the 1.75 percent security due in May 2023 gained 22/32, or $6.88 per $1,000 face amount, to 96 14/32.

Thirty-year bond yields decreased five basis points to 3.32 percent even after today’s auction attracted lower-than-average demand.

Yield Surge

Ten- and 30-year yields have reached 14-month highs since May as investors weighed whether the economy is strengthening enough for policy makers to consider reducing bond purchases that have been used to keep borrowing rates low. Bernanke told Congress May 22 the Fed could start scaling back bond buying at its “next few meetings” if the U.S. employment outlook shows sustainable improvement.

The Fed bought $3.29 billion of Treasuries today due from August 2020 to February 2023 after investors submitted $8.19 billion of the securities for sale.

The central bank “was getting perhaps a bit concerned about the pace of interest-rate increases via the Treasury market,” said Christopher Sullivan, who oversees $2.1 billion as chief investment officer at United Nations Federal Credit Union in New York. “They thought it prudent to cap those rates here because likely the underlying expansion of the economy couldn’t withstand those increases.”

The 10-year note yield will end the year at 2.35 percent, according to the median forecast of 76 economists in a Bloomberg News survey. That’s up from a 2.20 percent forecast in a similar survey last month.

Bond Auction

Today’s auction of 30-year bonds drew a yield of 3.355 percent, the highest since March 2012, compared with a forecast of 3.324 percent in a Bloomberg News survey of eight of the Fed’s 21 primary dealers.

The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities that were offered, was 2.47, versus an average of 2.58 for the previous 10 sales.

“There is concern about whether investors want to take much risk in general ahead of the FOMC next week,” said Michael Pond, head of global inflation-linked research at Barclays Plc, referring to the policy-setting Federal Open Market Committee. As a primary dealer, Barclays is obligated to bid at U.S. government debt auctions.

Indirect bidders, an investor class that includes foreign central banks, purchased 40.2 percent of the bonds, compared with an average of 36.7 percent for the past 10 sales.

Falling Demand

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 8.5 percent of the securities, compared with an average of 13.8 percent at the past 10 auctions.

Yesterday’s $21 billion sale of 10-year notes drew a bid-to-cover ratio of 2.53, the lowest since August. At an auction of $32 billion in three-year notes on June 11, the ratio was 2.95, the least since December 2010.

The government said it will sell $7 billion in 30-year Treasury Inflation Protected Securities on June 20.

A gauge of traders’ inflation outlook reached the lowest since January 2012. The difference between yields on U.S. 10-year notes and same-maturity inflation-indexed securities shrank to as little as 2 percentage points. The gap, known as the 10-year break-even rate, signals expectations for consumer prices over the life of the debt. It reached a 2013 high of 2.61 percentage points on Feb. 4.

Haven Demand

Treasuries gained earlier as investors sought refuge after the World Bank lowered its forecast for global growth amid concern central banks are considering easing stimulus measures. The World Bank pared projections yesterday for economic expansion in 2013 to 2.2 percent from a January estimate of 2.4 percent.

Japan’s Nikkei 225 Stock Average fell 6.4 percent, and the MSCI Asia Pacific Index of stocks dropped 2.2 percent. The Standard & Poor’s 500 Index gained 1.3 percent after declining 0.3 percent.

The Bank of Japan refrained at a policy meeting this week from adding to its stimulus program after announcing in April it would double monthly debt purchases to achieve 2 percent inflation. While the European Central Bank kept its key interest rate unchanged at 0.5 percent on June 6, it didn’t announce additional stimulus.

“The No. 1 thing that today’s market shows you is that Treasuries remain an international asset class,” said Ira Jersey, an interest-rate strategist at Credit Suisse Group AG in New York, a primary dealer. “When you have global angst in risky assets, even if the U.S. isn’t doing that badly, people still move to Treasuries to find a safe haven.”

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