Treasury 10-year yield trades at almost 2013 low on Fed outlook

Treasury 10-year yields traded at almost the lowest level this year and volatility slid to a record on bets the Federal Reserve will affirm its commitment to the pace of bond purchases to support growth.

Benchmark 10-year notes gained as a private report showed employers added fewer jobs than forecast last month. Treasuries capped a third monthly gain yesterday on signs the U.S. economic recovery is losing momentum, reinforcing speculation the Fed won’t scale back unprecedented monetary stimulus, known as quantitative easing, or QE, following a two-day meeting ending today. The Treasury said it may decide to “gradually” cut coupon auction sizes and plans a floating-rate note sale as early as the fourth quarter.

“Over the past two months, we’ve started to see economic data slow down; It’s full speed ahead on QE,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “Maybe we’ll see nonfarm payrolls come in weaker than anticipated. Treasuries have already rallied pretty substantially. The question is ’are we going to test that 1.50% level?”

The benchmark 10-year yield declined three basis points, or 0.03 percentage point, to 1.64% at 8:29 a.m. in New York, after reaching the lowest level since Dec. 12 yesterday, according to Bloomberg Bond Trader prices. The 2% note maturing in February 2023 added 9/32, or $2.81 per $1,000 face amount, to 103 1/4.

Treasury Auctions

The U.S. will sell $32 billion in three-year notes, $24 billion in 10-year debt and $16 billion in 30-year bonds on three consecutive days starting May 7, the Treasury announced.

The Treasury said it may gradually decrease coupon auction sizes and estimated the first floating rate auction will be held in the fourth quarter this year or in the first quarter of 2014.

In its quarterly refunding statement today, the Treasury said a final rule on the floating-rate note auction is planned for coming months, with a first sale estimated to occur either in the fourth quarter this year or the first quarter of 2014. The department said it will use the weekly high rate of 13-week Treasury bill auctions as the index for the notes.

U.S. government securities returned 1.1% in April, according to Bank of America Merrill Lynch indexes. The Standard & Poor’s 500 Index of shares gained 1.9% including reinvested dividends, data compiled by Bloomberg show.

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