Treasuries Fall Before Fed Policy Makers Meet, Bond Sales

The difference between five- and 30-year yields narrowed to the least since 2009 as Federal Reserve policy makers prepare to start a two-day meeting tomorrow where they are forecast to reduce monthly bond-buying.

U.S. note yields rose as the Federal Open Market Committee is forecast to scale back its monthly debt purchases to $25 billion from $35 billion after its meeting ends July 30. A report is projected to show the economy expanded at a 3 percent annual rate in the second quarter after contracting 2.9 percent during the first three months of the year.

“With economic uncertainty, geopolitical issues flaring up everywhere and the Fed expected to remain accommodative there remains solid demand for Treasuries, with no pressure for higher yields until something changes,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co.

The gap between five- and 30-year yields narrowed to 154 basis points at 10:30 a.m. New York time, according to Bloomberg Bond Trader data, the least since January 2009.

The five-year note yield rose two basis points, or 0.0s percentage point, to 1.69 percent. The 1.625 percent securities due in June 2019 fell 2/32, or 63 cents per $1,000 face amount, to 99 22/32.

Note Sale

The U.S. is due to auction $108 billion of floating and fixed-rate notes this week, including $29 billion in two-year notes today.

The U.S. central bank has kept its target for overnight bank lending in a range of zero to 0.25 percent since December 2008. The Fed is also scaling back the bond purchases it has used to support the economy, after increasing the size of its balance sheet to a record $4.41 trillion.

“The 10-year at 2.48 percent -- it’s an indictment on the part of the market that the economic outlook looks quite timid at best,” said Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York. “The front end of the curve is likely to remain anchored.”

For the first time since 2007, Treasuries offer higher yields than government debt in Europe. That’s largely due to European Central Bank President Mario Draghi, who pushed the region’s borrowing costs to record lows after announcing an unprecedented set of stimulus measures last month including negative interest rates to prevent deflation.

Fed Policy

With Fed Chair Janet Yellen trying to extricate the central bank from more than five years of its own extraordinary monetary policies to support the world’s largest economy, the relative advantage may help attract more overseas investors to Treasuries and prolong their biggest advance in four years. At 2.49 percent, 10-year notes yield more than twice as much as German bunds, the biggest premium since 1999.

Treasuries from two-year notes to 30-year bonds now yield an average of 1.54 percent, or 0.32 percentage point more than euro-area bonds. That’s the most since 2007. As recently as last year, U.S. debt yielded a percentage point less.

The Treasury plans to sell $35 billion in five-year securities tomorrow and $29 billion of seven-year notes on July 30. It will also sell $15 billion in two-year floating-rate debt on July 30.

At the previous sale in June, the Treasury sold two-year notes at 0.511 percent, the highest yield in more than three years. Investors bid for 3.23 times the amount of debt available. The notes being sold today yielded 0.54 percent in pre-auction trading.

Jobs Outlook

The U.S. added more than 200,000 jobs for a sixth month in July, according to a Bloomberg News survey of economists before the Labor Department report Aug. 1. Gross domestic product figures, published a day earlier, will show the world’s biggest economy expanded in the second quarter after contracting in the first, a separate survey shows.

“U.S. longer-term yields have been through a volatile period and there is some more volatility in store,” Lena Komileva, chief economist at G Plus Economics in London, wrote in an e-mailed report today. “GDP and payrolls pose the greatest uncertainty. There is a bias towards higher yields this week.”

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