Treasuries Advance on Speculation Fed Will Maintain Bond-Buying

Treasuries rose for a second day on speculation the Federal Reserve led by Chairman Ben S. Bernanke won’t signal a change next week in its program of $85 billion a month in bond purchases.

Benchmark 10-year securities fluctuated earlier as a gauge of July consumer confidence exceeded forecasts. U.S. debt is poised to end two weeks of gains after the U.S. sold $99 billion of notes over the previous three days, including seven-year debt at the highest yield since July 2011. Analysts predict data next week will show American home prices rose at the fastest in seven years in May and the jobless rate fell this month.

“I don’t expect any surprises from the Fed given how many times Bernanke’s spoken in the past six weeks,” said Gary Pollack, who manages $12 billion as the head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York. “They’re going to reiterate the talking points that we’ve heard.”

U.S. 10-year note yields fell one basis point, or 0.01 percentage point, to 2.56 percent at 2:37 p.m. in New York, according to Bloomberg Bond Trader data. The price of the benchmark 1.75 percent security maturing in May 2023 rose 3/32, or 94 cents per $1,000 face amount, to 93. The yield has increased eight basis points this week.

Treasuries handed investors a loss of 0.2 percent since the end of June, with the securities poised for a third monthly decline, the Bloomberg U.S. Treasury Bond Index shows. For the year, the index has fallen 2.6 percent. The MSCI World Index of shares has returned 5.9 percent in July and 13 percent in 2013, including reinvested dividends.

Economic Data

The Thomson Reuters/University of Michigan final index of U.S. consumer sentiment increased to 85.1 in July from 84.1 the prior month. The median forecast in a Bloomberg survey called for 84 in the final July gauge after a preliminary reading of 83.9.

The S&P/Case-Shiller index of U.S. home prices rose 12.4 percent in May from a year earlier, which would be the biggest gain since February 2006, a separate Bloomberg survey showed before the report on July 30. The U.S. unemployment rate fell to 7.5 percent in July from 7.6 percent in June, while payrolls climbed by 185,000, according to economists before the Labor Department releases the figures on Aug. 2.

“Even if the headline payroll gain is near consensus, the market is not accounting for the risk of a sudden drop in the unemployment rate,” Barclays Plc strategists led by Rajiv Setia in New York wrote in a research note. “Investors should brace themselves for the likelihood of a further selloff.”

Yields on 10-year notes are likely to climb faster than those on 30-year bonds, the analysts forecast.

Trading Levels

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, increased to $352 billion yesterday, the highest level since July 17 and above this year’s average of about $320 billion.

Volatility in Treasuries as measured by the Merrill Lynch Option Volatility Estimate MOVE Index increased to 82.6 yesterday from 80.2 the previous day. The gauge has fallen from 117.89 on July 5, which was the highest since December 2010.

Primary dealers won 34.9 percent of the $29 billion of seven-year notes auctioned yesterday, the least since December 2010. The securities were sold at a high yield of 2.026 percent, up from 1.932 percent at the previous auction on June 27. Investors submitted a below-average number of bids at the $35 billion offerings of two-year notes on July 23 and five-year notes on July 24.

‘Trending Up’

“The primary-dealer community wasn’t left with a whole lot of supply to distribute,” said Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc., which as one of the Fed’s 21 primary dealers is obligated to bid in U.S. debt sales. “That’s why the market is trending up a little bit.”

The Fed purchased $1.46 billion of Treasury bonds maturing from February 2036 to November 2042 as part of its quantitative-easing program intended to stimulate growth through capping borrowing costs.

The central bank, which has been buying $85 billion of bonds each month, will probably start trimming purchases in September, according to a Bloomberg News survey.

The Federal Open Market Committee next meets to review policy on July 30-31. The central bank has kept its target for overnight bank lending in a range from zero to 0.25 percent since December 2008.

The FOMC said in a June 19 statement that leaving the federal-funds rate in that range “will be appropriate at least as long” as unemployment remains above 6.5 percent and the forecast for inflation in one-to-two years doesn’t exceed 2.5 percent. Bernanke said on July 17 the jobless rate isn’t the only measure of labor-market health.

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