Treasury 10-Year Notes in Longest Rally Since February on Fed

Treasury 10-year notes rose for a fourth day, the longest rally since February, after Federal Reserve Chairman Ben S. Bernanke called for maintaining stimulus amid division among policy makers on when to slow bond buying.

Treasury notes remained higher after the U.S. sold $13 billion in 30-year bonds at the highest yield in almost two years. Benchmark 10-year yields approached the biggest weekly drop in more than a year after Bernanke said yesterday “highly accommodative monetary policy” was needed for the foreseeable future to support the economy. The yield climbed to the highest level since August 2011 earlier this week on speculation the Fed will scale back purchases.

“You had more evidence from the Fed that they are going to great lengths to make the market realize that they are very data dependent and are not talking about tightening,” said David Coard, head of fixed-income trading in New York at Williams Capital Group LP, a brokerage for institutional investors. The Fed “won’t do anything that will jeopardize a recovery that’s still somewhat fragile.”

Benchmark 10-year note yields fell five basis points, or 0.05 percentage points, to 2.57 percent at 5 p.m. New York time, according to Bloomberg Bond Trader data. The price of the 1.75 percent note maturing in May 2023 rose 14/32, or $4.38 per $1,000 face value, to 92 28/32.

The current 30-year bond yield fell two basis points to 3.63 percent. The yield touched 3.72 percent on July 8, the highest since August 2011, and has increased from this year’s low of 2.81 percent on May 1.

Volatility, Volume

Volatility in Treasuries as measured by the Merrill Lynch Option Volatility Estimate MOVE Index dropped to 93.54, the lowest level since June 19. It touched 117.89 on July 5, the highest since December 2010. The one-year average is 64.

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, rose to $346.7 billion, the highest since July 5. The 2013 average is $322 billion.

The 10-year note yield will rise to 2.62 percent by year-end, according to the median forecast of 67 economists surveyed by Bloomberg News July 5-10. The figure is up from a median forecast of 2.33 percent in a June 7-12 survey of 78 economists.

U.S. yields have climbed since June 18, the day before Bernanke said the central bank may reduce the $85 billion of Treasuries and mortgages it buys each month and end them in mid-2014 if the economy performs in line with Fed projections.

‘Cold Feet’

“The cold feet that a lot of investors have had about getting back in the long end is continuing,” Tom Simons, an economist in New York at Jefferies LLC, one of the primary dealers obligated to bid at U.S. debt auctions, said before the sale. “There’s still some reticence out there.”

The securities sold today drew a yield of 3.66 percent, the highest since August 2011, compared with a forecast of 3.68 percent in a Bloomberg News survey of seven 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 2.26, the lowest since August 2011, versus an average of 2.59 for the previous 10 sales.

Indirect bidders, an investor class that includes foreign central banks, purchased 40.2 percent of the bonds, matching the highest since March, and compared with an average of 37.1 percent for the past 10 sales.

Three Sales

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 16.3 percent of the securities, highest since April, compared with an average of 13.9 percent at the past 10 auctions.

Today’s auction is the final of three sales this week of coupon-bearing debt totaling $66 billion. The U.S. announced it will sell $15 billion in 10-year Treasury Inflation Protected Securities on July 18.

A $21 billion 10-year note sale yesterday drew a bid-to-cover ratio of 2.57 and an auction of $32 billion in three-year notes on July 9 yielded 0.719 percent.

Investors have bid $2.93 for each dollar of the $1.143 trillion in U.S. government notes and bonds sold at auction this year, according to Treasury data compiled by Bloomberg. That’s down from the record $3.15 for the $2.153 trillion sold at last year’s offerings.

Fed Futures

Bernanke’s comments yesterday, in response to a question after a speech in Cambridge, Massachusetts, were made just three hours after the Fed released the minutes of the June 18-19 meeting.

While about half of the 19 participants in the Federal Open Market Committee wanted to halt the $85 billion in monthly bond purchases by year-end, many said they wanted to see more signs that employment is improving before they’ll begin slowing the bond purchases, according to the minutes.

“The Fed had to do something,” said Michael Franzese, senior vice president of fixed-income trading at ED&F Man Capital Markets in New York. “They didn’t want anything to upset the applecart of the economic gains they have made.”

The Labor Department on July 5 reported the U.S. added 195,000 jobs last month. A Bloomberg News survey had projected 166,000.

The Fed has kept its target for overnight bank lending in a range of zero to 0.25 percent since December 2008. It has said it will consider raising the target when the unemployment rate falls to 6.5 percent, versus 7.6 percent as of June.

Thirty-day federal funds futures contracts for delivery in April 2015 yielded 0.52 percent, indicating investors expect the Fed target to be higher by then. As recently as July 5, the securities for delivery in February 2015 were indicating an increase in the Fed target. The contract settles at the average overnight fed funds rate for the delivery month.

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