Treasury Yields Fall to Lowest in 6 Weeks on Fed Stimulus Policy

Treasury 10-year note yields fell to the lowest level in six weeks as investors bet the Federal Reserve will maintain monetary stimulus as it awaits a pick-up in economic growth, stoking demand for government debt.

Treasuries remained higher as the U.S. sold $33 billion of two-year notes at a yield of 0.348 percent, below a forecast of

0.354 percent in a Bloomberg News survey of seven of the Federal Reserve’s 21 primary dealers. The Fed last week maintained its policy of buying $85 billion of debt a month to put downward pressure on borrowing costs, causing investors to push back forecasts for when the central bank will raise interest rates.

There’s a “gradual acceptance by the market that the Fed will remain accommodative,” said Aaron Kohli, an interest-rate strategist in New York at BNP Paribas SA, a primary dealer. “The market is going to be grinding to lower yields over the next few months.”

The benchmark 10-year note yield fell five basis points, or

0.05 percentage point, to 2.66 percent at 5 p.m. in New York, based on Bloomberg Bond Trader data, after declining five basis points in the previous two trading days. The yield touched 2.64 percent, the lowest since Aug. 13. The price of the 2.5 percent security due in August 2023 added 3/8, or $3.75 per $1,000 face value, to 98 21/32.

The current two-year yield was little changed at 0.33 percent.

Auction Participation

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, rose 35 percent to $306.3 billion, from $226 billion yesterday. Volume surged to $459.9 billion on Sept. 18, when the Fed unexpectedly maintained the pace of its bond-buying program known as quantitative easing.

At today’s two-year note auction, indirect bidders, an investor class that includes foreign central banks, purchased 24 percent of the notes, compared with an average of 24.1 percent for the past 10 sales.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 21.8 percent of the notes at the sale, compared with an average of 22.6 percent for the past 10 auctions.

“It was a solid auction all the way through -- shorts are getting squeezed with the Fed now not in play with tapering,” said Michael Franzese, senior vice president of fixed-income trading at ED&F Man Capital Markets in New York. “There’s a certain amount of give-back. This is a reflection of people having money to invest.” A short position is a bet an asset will decline in value.

New Cash

Two-year notes have gained 0.2 percent this year, compared with a decline of 2.9 percent by Treasuries overall, according to Bank of America Merrill Lynch indexes. The two-year securities returned 0.3 percent in 2012, while Treasuries overall rose 2.2 percent.

The sales this week, along with last week’s $13 billion 10-year TIPS auction, will raise $47.6 billion of new cash, as maturing securities held by the public total $62.3 billion, according to the Treasury.

Investors bid $2.88 for each dollar of the $1.554 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.

The Treasury also plans to sell $35 billion of five-year notes tomorrow and $29 billion of seven-year debt the next day.

‘Grinding Higher’

Investors in Treasuries were long this week, betting that the prices of the securities will rise, according to a survey by JPMorgan Chase & Co.

The proportion of net longs remained steady at 8 percentage points in the week ending yesterday, according to JPMorgan, matching the position in the week ending Sept. 16. Outright longs dropped to 19 percent, from 21 percent, while outright shorts dropped to 11 percent from 13 percent. Investors raised neutral bets to 70 percent from 66 percent.

“Momentum remains relatively constructive in the Treasury market in the wake of the Fed’s decision not to taper,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “The market is grinding a little bit higher.”

Treasuries due in one to 10 years have returned 0.1 percent this quarter as of yesterday, based on the Bloomberg World Bond Indexes. U.S. government securities maturing in a decade and longer dropped 2.9 percent.

Washington Debate

The market for U.S. government debt has yet to react to any potential impasse over raising the borrowing ceiling. Most federal operations would come to a halt when the fiscal year ends Sept. 30 if President Barack Obama’s administration and lawmakers can’t agree on a funding plan.

Treasuries that mature on Oct. 15 yielded 0.035 percent, from 0.037 percent two weeks ago. The rate on debt due Nov. 7 has held within two basis points of zero during the period.

Treasuries remained higher today as a report showed home prices in 20 U.S. cities rose in the 12 months through July by the most in more than seven years, helping boost owner equity.

The S&P/Case-Shiller index of property values in 20 cities increased 12.4 percent from July 2012, matching the median projection of 31 economists surveyed by Bloomberg and the biggest year-to-year advance since February 2006, a report from the group showed today in New York.

The Conference Board’s index of U.S. consumer confidence decreased to 79.7 in September from a revised 81.8 a month earlier, data from the New York-based private research group showed today. The Richmond Fed’s manufacturing index tumbled to zero from 14.

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