Treasuries Gain Amid Speculation Yellen Will Say Growth Gradual

Treasuries rose, with the yield on the 30-year bond approaching the lowest in 11 months, amid bets Federal Reserve Chair Janet Yellen will tell Congress this week economic growth is gradual and inflation remains tamed.

Three-year notes were little changed after the U.S. sold $29 billion of the securities at the highest yield since May

2011. The difference between yields on five-year notes and 30-year bonds shrank to almost the narrowest since 2009. Yellen makes the first of two appearances before lawmakers tomorrow. The U.S. will auction $24 billion in 10-year notes tomorrow and $16 billion in 30-year bonds on May 8.

“People are more focused on what we may hear tomorrow from Yellen when she testifies,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “Supply later this week will be a factor.”

Thirty-year bond yields fell two basis points, or 0.02 percentage point, to 3.38 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. They touched 3.35 percent yesterday, the lowest since June 19. The price of the

3.625 percent debt due in February 2044 increased 15/32, or $4.69 per $1,000 face amount, to 104 1/2.

Yields on the benchmark 10-year note declined two basis points to 2.59 percent after reaching 2.57 percent yesterday, matching the lowest level since Nov. 1. The current three-year note yield traded little changed at 0.88 percent.

Auction Stats

The three-year notes auctioned today yielded 0.928 percent, matching a forecast in a Bloomberg News survey of six primary dealers.

The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.4, versus 3.36 at the last sale and an average of 3.32 at the past 10 offerings.

Indirect bidders, an investor class that includes foreign central banks, purchased 28.1 percent of the notes, compared with an average of 34.3 percent at the past 10 sales.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 24.5 percent of the notes, the most since February 2013, compared with an average of 17.7 percent at the past 10 auctions.

The three-year note is “pricing in a lot of the risk of Fed policy in the future, what happens, when and how aggressively,” said Aaron Kohli, an interest-rate strategist in New York at BNP Paribas SA, which as one of the Fed’s 22 primary dealers is obliged to bid in U.S. debt sales. “It was a fair auction. Overall it was slightly better than average.”

Note Returns

Three-year notes have returned 0.3 percent this year, compared with a gain of 2.4 percent by the broader Treasuries market, according to Bank of America Merrill Lynch indexes. The three-year securities lost 0.1 percent in 2013, while Treasuries overall fell 3.4 percent.

Longer-term Treasuries rose even after a report showed the U.S. trade deficit narrowed in March as exports grew by the most in nine months, signaling that American economic growth was poised to pick up. The U.S. economy added 288,000 jobs last month, the most since 2012, the Labor Department reported May 2.

The difference between the yields on five-year notes and 30-year bonds was 1.7 percentage points. It touched 1.68 percentage points on May 2, the narrowest since September 2009.

“There’s a need for long-dated paper,” said Sean Murphy, a trader in New York at the primary dealer Societe Generale SA. “For now, the market trades well.”

Yellen Testimony

Yellen is scheduled to testify to the congressional Joint Economic Committee tomorrow and will speak to the Senate Budget Committee on May 8.

The Fed said April 30 it will keep the benchmark interest-rate target at virtually zero for a “considerable time” after its bond-buying program ends. It reduced monthly debt purchases to $45 billion, its fourth straight $10 billion cut, and said further reductions are likely in “measured steps” if the economy continues to improve.

Yellen said on April 16 in a speech in New York that wage increases remain at a historically slow pace slow pace and the chances of inflation rising above the Fed’s 2 percent goal were “significantly below the chances of inflation persisting below 2 percent.”

The Fed’s preferred measure of inflation, the personal consumption expenditures deflator, rose 1.1 percent in March from a year ago, a report on May 1 showed. The gauge has fallen short of the bank’s 2 percent target for almost two years.

Rate Bets

Futures prices put the likelihood the Fed will start raising borrowing costs by its June 2015 meeting at 47 percent, based on trading on the CME Group Inc.’s exchange. It was 64 percent a month ago. The central bank has held its target for the federal-funds rate at zero to 0.25 percent since December


Turmoil in Ukraine has supported Treasuries as investors sought the relative safety of government debt. Russia said Ukraine should postpone a May 25 presidential election until it changes its constitution, as the government in Kiev continued a deadly military push to stamp out pro-Russian separatists in the country’s east and south. Fighting has killed four servicemen and more than 30 rebels.

Before it's here, it's on the Bloomberg Terminal.