U.S. 10-year yields touch 3-week high before sale, Fed decision

Treasuries fell, pushing 10-year note yields to a three-week high as the U.S. prepares to sell $21 billion of the debt and the Federal Reserve begins a two-day meeting amid bets it will add monetary stimulus.

U.S. 30-year bond yields rose for a second day as a gauge of inflation expectations in the U.S. reached the highest level since March. Germany’s top constitutional court backed the ratification of Europe’s permanent bailout fund, damping demand for the safest assets. The U.S. 10-year note sale is the second of three note and bond auctions this week totaling $66 billion.

“You’re getting concessions for the auctions and a risk-on flavor out of Europe this morning,” said Sean Murphy, a trader at Societe Generale SA in New York, one of the 21 primary dealers that are obligated to bid in U.S. debt sales. “It pressures Treasuries, and now you have to take down supply ahead of expectations of further stimulus from the Fed.”

The benchmark 10-year yield climbed five basis points, or 0.05 percentage point, to 1.75 percent at 9:16 a.m. in New York, according to Bloomberg Bond Trader prices. It was the highest level since Aug. 22. The 1.625 percent note due in August 2022 dropped 13/32, or $4.06 per $1,000 face amount, to 98 29/32.

The 30-year yield rose five basis points to 2.91 percent after climbing five basis points yesterday.

Inflation Bets

The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of traders’ outlook for consumer prices, widened to 2.4 percentage points, exceeding the highest closing figure since March 21. The average over the past decade is 2.16 percentage points.

Investors in U.S. government securities have earned 2 percent in 2012 as of yesterday, according to Bank of America Merrill Lynch indexes. The Standard & Poor’s 500 Index has gained 16 percent, including reinvested dividends.

The 10-year notes scheduled for sale today yielded 1.75 percent in pre-auction trading, compared with 1.68 percent at the last auction, on Aug. 8. The record auction low of 1.459 percent was set at the July offering. Investors bid for 2.49 times the amount of the securities offered last month, the least in three years.

A sale yesterday of $32 billion in three-year notes drew bids for 3.94 times the securities available, the most on record. The U.S. will auction $13 billion of 30-year bonds tomorrow.

The central bank will probably announce a third round of bond purchases tomorrow, according to almost two-thirds of economists in a Bloomberg survey, while also extending its zero- interest-rate policy into 2015.

Unconventional Policies

Chairman Ben S. Bernanke and his colleagues on the Federal Open Market Committee will once again roll out unconventional policies to bolster economic growth of less than 2 percent in the second quarter and bring down unemployment stuck above 8 percent for 43 straight months, the survey showed.

The Fed is in the process of swapping shorter-term Treasuries in its holdings with those due in six to 30 years to put downward pressure on long-term borrowing costs. It’s scheduled to sell as much as $8 billion of debt today maturing from April 2014 to November 2014 as part of the program, according to Fed Bank of New York’s website.

German 10-year bund yields touched 1.65 percent today, the highest level since June 29, as demand for refuge faded.

“Treasuries are being dragged lower with bunds after the court verdict as safe assets are suffering across the board,” said Michael Leister, a fixed-income strategist at Commerzbank AG in London.

The German Federal Constitutional Court stipulated that a cap of about 190 billion euros ($246 billion) be placed on the country’s liabilities before the European Stability Mechanism is ratified, unless parliament decides to back extra funds.

The court dismissed motions filed by groups seeking to block the fund, ending legal challenges that delayed efforts by euro-area leaders to contain the debt crisis.

Bloomberg News

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