Treasuries little changed before Fed meets on bond-buying plan

Trading Levels

Treasury trading volume at ICAP Plc, the largest inter- dealer broker of U.S. government debt, increased to $352 billion yesterday, the highest level since July 17 and above this year’s average of about $320 billion.

Volatility in Treasuries as measured by the Merrill Lynch Option Volatility Estimate MOVE Index increased to 82.6 yesterday from 80.2 the previous day. The gauge has fallen from 117.89 on July 5, which was the highest since December 2010.

The seven-year notes auctioned yesterday drew bids for 2.54 times the $29 billion offered, the lowest since May 2009. The securities were sold at a high yield of 2.026%, up from 1.932% at the previous auction on June 27. Investors submitted a below-average number of bids at the $35 billion offerings of two-year notes on July 23 and five-year notes on July 24.

“Demand was a little bit on the tepid side” at the auctions, said Gary Pollack, who manages $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York. “The market is preparing itself for a tapering at some point.”

Fed Buys

The Fed is scheduled to buy as much as $1.75 billion of Treasuries maturing in February 2036 to May 2043 today as part of its quantitative-easing program intended to stimulate growth through capping borrowing costs.

The Fed, which has been buying $85 billion of bonds each month, will probably start trimming purchases in September, according to a Bloomberg News survey.

The Fed’s Open Market Committee next meets to review policy on July 30-31. The central bank has kept its target for overnight bank lending in a range from zero to 0.25% since December 2008.

The FOMC said in a June 19 statement that leaving the federal funds rate in that range “will be appropriate at least as long” as unemployment remains above 6.5% and the forecast for inflation in one-to-two years doesn’t exceed 2.5%. Chairman Ben S. Bernanke said on July 17 the jobless rate isn’t the only measure to labor-market health.

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