Treasury 10-Year Notes in Narrowest Range in Month as Fed Meets

Treasury 10-year note yields were in the tightest range in more than a month amid speculation the Federal Reserve may indicate when it will begin slowing bond purchases at the end of its two-day policy meeting tomorrow.

Yields rose earlier even after reports showed consumer prices increased in May at a slower pace than forecast, staying below the Fed’s target inflation rate, and housing starts trailed forecasts. The yield gap between 10-year Treasuries and Treasury Inflation Protected Securities, a gauge of traders’ expectations for consumer prices over the life of the debt, was at almost a 17-month low.

“No one wants to take on too much risk before they hear from the Fed,” said Scott Graham, head of government bond trading at Bank of Montreal’s BMO Capital Markets unit in Chicago, one of the 21 primary dealers that trade with the central bank. “If we get some sign of tapering sooner than later, the market will take it rough and we should see new highs in yields. And if they are dovish, we should rally.”

The benchmark 10-year yield was little changed at 2.19 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices, after rising three basis points earlier, or 0.03 percentage point, and falling one basis point. The price of the 1.75 percent security maturing in May 2023 lost 1/32, or 31 cents per $1,000 face amount, to 96 1/8. The yield climbed five basis points yesterday.

Ten-year note yields traded in a 4.88 basis-point range between 2.216 and 2.1673 percent, the narrowest since May 9.

Real Yields

Real yields on 10-year Treasuries after subtracting the annualized increase in consumer prices for May were about 80 basis points, compared with an average of about nine basis points this year.

The 10-year break-even rate increased three basis points to 2.09 percentage points after touching 2 percentage points on June 13, the lowest level since January 2012. The average over the past 12 months is 2.38 percentage points.

Fed Chairman Ben S. Bernanke will hold a press conference tomorrow after Federal Open Market Committee policy makers end their meeting and issue a statement and economic forecasts. Bernanke said last month the central bank could reduce its $85 billion in monthly bond purchases, known as quantitative easing, if there’s sustainable improvement in employment.

Investors should buy U.S. 10-year notes as yields rise toward 2.3 percent before the FOMC announcement, William O’Donnell, head U.S. government-bond strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut, a primary dealer, wrote in a note to clients.

‘Bit Dovish’

Investors should not “be selling into weakness ahead of the meeting on this most recent tapering fear,” O’Donnell wrote. While the Fed “would like to begin the tapering process,” it will probably go “no further than that in advancing the conversation and if anything, being a bit dovish away from that in order to soothe ruffled market feathers.”

The central bank will trim its bond purchases to $65 billion a month at the Oct. 29-30 Federal Open Market Committee meeting, according to a Bloomberg News survey of economists.

The Fed bought $1.46 billion of Treasuries today maturing from February 2036 to February 2043, according to the website of the Fed Bank of New York. Dealers submitted $2.82 billion of the securities.

The U.S. consumer price index was up 0.1 percent after falling 0.4 percent in April, the Labor Department reported in Washington. The median forecast of 82 economists surveyed by Bloomberg News called for an increase of 0.2 percent. The core index, which excludes volatile food and fuel costs, climbed 0.2 percent as projected.

Stimulus Space

For the 12 months that ended in May, consumer prices increased 1.4 percent, versus a 1.1 percent year-over-year gain reported in April that was the lowest since 2010. The central bank’s inflation target is 2 percent.

Low inflation gives the Fed room to maintain record economic stimulus as policy makers seek to lower a jobless rate of 7.6 percent, even amid signs of economic improvement. Reports yesterday showed homebuilder confidence climbed to a seven-year high and New York-area manufacturing unexpectedly increased.

The data put “more things on the question list,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee.

‘So Ambiguous’

“It’s not that you lay out the evidence and say, ‘Oh, my God, it’s so obvious,’” Vogel said. “You lay out the evidence and say, ‘Oh, my God, it’s so ambiguous.’”

Thirty-year bond yields declined one basis point to 3.34 percent after increasing two basis points earlier and falling as much as three basis points.

The yield gap between 10- and 30-year Treasuries narrowed to 1.16 percentage points today after touching 1.19 on June 14, the widest on an intraday basis in three weeks. Historically, a so-called steeper yield curve reflects diminishing demand from investors anticipating faster economic growth and inflation. A flatter yield curve reflects rising demand from investors anticipating slower economic growth and inflation.

Housing starts rose 6.8 percent in May to a 914,000 annualized rate, the Commerce Department reported. A Bloomberg survey forecast a 950,000 rate.

U.S. Treasury note investors’ optimism climbed this week, according to a JPMorgan weekly poll of clients that showed the first net-long position, or bet the securities would increase in value, since April. It was the highest net-long reading since January.

The net percentage increased to 4 percent, from negative 17 percent the previous week. The net figure is the difference between the percentage of investors expecting prices on the debt to increase and those taking short positions on the securities, or betting that prices will fall.

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