Treasury 7-Year Yields Fall to 4-Month Low on Fed Before Auction

Treasuries rose, with seven-year yields falling to the lowest level in four months, amid speculation subdued inflation and slowing growth will boost demand at a sale of $29 billion of the securities today.

Benchmark 10-year yields dropped toward a three-month low after ADP Research Institute said U.S. companies added the fewest workers this month since April and the consumer price index in September gained the least year-to-year in five months. Federal Reserve policy makers end a two-day meeting today at which they will maintain monthly asset purchases at $85 billion, according to a Bloomberg News survey of economists.

“The ADP gave us an excuse to break through the 2.50 percent level, the CPI data was generally bond friendly,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, which oversees $11 billion in fixed income assets. “Every market participant knows that October was a tough month for the jobs market.”

The seven-year yield declined three basis points, or 0.03 percentage point, to 1.85 percent at 11:57 a.m. in New York, according to Bloomberg Bond Trader prices, the least since June 21. The 2 percent note due in September 2020 rose 5/32, or $1.56 per $1,000 face amount, to 100 30/32.

The U.S. 10-year yield fell two basis points to 2.48 percent. It dropped to 2.47 percent on Oct. 23, the lowest level since July 22.

‘Macroeconomic Disappointments’

The median estimate of economists surveyed by Bloomberg is for 10-year yields to rise to 2.76 percent by Dec. 31.

The seven-day relative strength index for the Treasury 10-year note yield was at 28.7 today, down from 31.3 yesterday, according to Bloomberg data. A reading lower than 30 or above 70 suggests the security may be poised for a change in direction.

The seven-year notes scheduled for sale today yielded 1.90 percent in pre-auction trading, compared with 2.058 percent at the previous auction on Sept. 26. Investors bid for 2.46 times the amount available last month, versus 2.43 times in August.

Today’s sale of seven-year securities is the last of three note auctions this week totaling $96 billion. Auctions of two- and five-year debt drew the lowest yields since May.

“We’re in a period where we could see macroeconomic disappointments, and tapering has been also moved further out by the market in their pricing,” said Niels From, chief analyst at Nordea Bank AB in Copenhagen. “It’s an environment that is supportive for Treasuries.”

Job Gains

Treasuries returned 1.8 percent since Sept. 17, according to Bloomberg World Bond Indexes. That’s the day before the Federal Open Market Committee unexpectedly refrained from reducing stimulus, saying it needed more evidence of lasting improvement in the economy. The securities have lost 1.7 percent this year through yesterday.

The 130,000 in jobs gains was down from 145,000 in September, which was revised lower, figures from Roseland, New Jersey-based ADP showed. The median forecast of 39 economists surveyed by Bloomberg called for an advance of 150,000, and the average for the past 10 months is 157,200.

The Fed will maintain monthly purchases of Treasuries at $45 billion and mortgage-backed securities at $40 billion until its March meeting, according to a Bloomberg survey of economists on Oct. 17-18.

Ben S. Bernanke’s term as Fed chairman ends on Jan. 31, and President Barack Obama has nominated Vice Chairman Janet Yellen as his successor.

‘Baseline Scenario’

“As Yellen is about to chair the FOMC from January 2014, the option to hold both MBS and Treasury securities until they mature seems to be the baseline scenario as of now,” Vincent Chaigneau, head of fixed-income and foreign-exchange strategy at Societe Generale SA, wrote in a research note today about the Fed meeting.

The consumer price index increased 0.2 percent, matching the median forecast of 86 economists surveyed by Bloomberg, after rising 0.1 percent the prior month, Labor Department data showed in Washington. Stripping out volatile food and fuel, the so-called core measure climbed 0.1 percent for a second month, less than projected.

Overall consumer prices increased 1.2 percent in the 12 months through September, the smallest gain since April, after a 1.5 percent year-over-year advance the prior month

Price swings in Treasuries as measured by Bank of America Merrill Lynch’s MOVE Index dropped to 58.54 on Oct. 28, the lowest level since May 16. It climbed to 58.81 yesterday.

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