Bloomberg News

Treasury Yield Is 3 Basis Points From 6-Week High as Fed Meets

January 31, 2012

Jan. 25 (Bloomberg) -- Treasury yields were three basis points from a six-week high before Federal Reserve policy makers issue projections for borrowing costs for the first time.

The U.S. is scheduled to sell $35 billion of five-year notes today and $29 billion of seven-year debt tomorrow. A $35 billion two-year auction yesterday drew stronger-than-average demand on speculation Treasuries will retain their refuge appeal as talks to restructure Greece’s debt reach a stalemate.

“In the short term, you can buy Treasuries because the Greece problem isn’t solved yet,” said Hiroki Shimazu, an economist in Tokyo at SMBC Nikko Securities Inc., a unit of Japan’s third-largest publicly traded bank by assets. “Longer term, I don’t recommend buying. The U.S. economy, even the housing market, is stronger than expected.”

U.S. 10-year yields held at 2.06 percent as of 11:48 a.m. in Tokyo, according to Bloomberg Bond Trader prices. The 2 percent security maturing in November 2021 changed hands at 99 15/32. The yield climbed to 2.09 percent on Jan. 23, the most since Dec. 8.

Japan’s 10-year rate slid 1/2 basis point to 1 percent, the first decline in seven sessions.

The Federal Open Market Committee will probably keep the key rate unchanged today, a Bloomberg survey of economists shows. After the meeting, policy makers will provide an explanation for their assessments along with rate predictions.

The Fed has left its target for overnight loans between banks in a range of zero to 0.25 percent since 2008 and last month reiterated that economic conditions may warrant “exceptionally low” rates at least through mid-2013.

‘Bearish Momentum’

“There has been bearish momentum in the markets,” said Suvrat Prakash, an interest-rate strategist in New York at BNP Paribas SA, one of the 21 primary dealers that trade with the Fed. “The market is stepping on the brake ahead of the FOMC meeting as it deals with the question of, is there less room for the Fed to provide easing?”

Confidence among U.S. homebuilders rose in January to the highest level in more than four years, the National Association of Home Builders/Wells Fargo reported on Jan. 18. A government report today will show U.S. home prices were unchanged in November after falling 0.2 percent in October, and private figures will show pending home sales dropped in December, Bloomberg surveys of economists show.

Auction Demand

The two-year auction’s bid-to-cover ratio, which gauges demand by comparing orders with the amount of debt offered, was 3.75, versus an average of 3.43 for the previous 10 sales.

The five-year notes being sold today yielded 0.925 percent in pre-auction trading, versus the record low of 0.88 percent at the prior sale on Dec. 20.

Investors bid for 2.86 times the amount offered in December, matching the average for the past 10 monthly auctions.

Indirect bidders, the category of investors that includes foreign central banks, bought 50.6 percent of the notes, the most in 16 months.

Treasury five-year notes have handed investors a 0.2 percent loss this year as of yesterday, versus a 0.8 percent decline for the broader market, according to indexes compiled by Bank of America Merrill Lynch.

U.S. corporate bonds have returned positive 0.7 percent, the figures show. The Standard & Poor’s 500 Index has rallied more than 4 percent in the period after accounting for reinvested dividends, according to data compiled by Bloomberg.

--With assistance from Cordell Eddings in New York. Editors: Naoto Hosoda, Rocky Swift

To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net;

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net


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