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Treasuries Little Changed Before $32 Billion 3-Year Note Sale

Feb. 12 (Bloomberg) -- Treasuries were little changed before the government sells $32 billion of three-year notes, the first of three auctions of coupon-bearing debt this week.

Ten-year yields were about 10 basis points from the highest level since April as economists said a government report tomorrow will show U.S. retail sales increased for a third month in January, damping demand for the safest assets. President Barack Obama will deliver his State of the Union address today as he attempts to persuade lawmakers and voters that his plan to revive growth and bring down unemployment will succeed.

“Confidence in the U.S. recovery should remain solid,” said Adam Donaldson, head of debt research in Sydney at Commonwealth Bank of Australia, the nation’s largest lender. “We should see the investment cycle coming through and underpinning growth, and that will eventually take Treasury yields higher.”

The benchmark 10-year yield fell one basis point, or 0.01 percentage point, to 1.96 percent at 9:01 a.m. in London, according to Bloomberg Bond Trader prices. The 1.625 percent note due in November 2022 gained 2/32, or 63 cents per $1,000 face amount, to 97 2/32.

The yield will climb to 2.10 percent by year-end, Commonwealth Bank’s Donaldson said.

Note Auction

Three-year notes yielded 0.41 percent in pre-auction trading, compared with 0.385 percent at the previous sale of the securities on Jan. 8. The record low auction yield was 0.327 percent in December.

Investors submitted orders to buy 3.62 times the amount of available debt last month, versus 3.36 times in December. The government is also scheduled to sell $24 billion of 10-year notes tomorrow and $16 billion of 30-year debt on Feb. 14.

Treasury three-year notes have handed investors a loss of 0.02 percent this year, according to Bank of America Merrill Lynch indexes. Ten-year notes declined 1.6 percent and 30-year bonds fell 3.9 percent, based on the data.

Retail sales climbed 0.1 percent last month after a 0.5 percent advance in December, according to the median forecast of economists surveyed by Bloomberg News before tomorrow’s Commerce Department report.

President Obama will deliver his State of the Union speech at 9 p.m. in Washington. “I’m going to be talking about making sure that we’re focused on job creation here in the United States of America,” Obama said last week to House Democrats at a meeting in Virginia.

Pimco Holdings

Bill Gross, who manages the world’s biggest bond portfolio at Pacific Investment Management Co., raised the percentage of Treasuries held in his flagship $286 billion Total Return Fund. Gross boosted the proportion of U.S. government and Treasury debt to 30 percent in January, the most since July, according to a report on the company’s website.

Federal Reserve Vice Chairman Janet Yellen signaled in comments yesterday the central bank may keep borrowing costs near zero when its asset-buying program ends, even after hitting its targets for unemployment or inflation.

Fed Chairman Ben S. Bernanke indicated at the conclusion of a two-day meeting last month he isn’t close to easing up on $85 billion in monthly bond purchases in the third round of so- called quantitative easing. Bernanke and his fellow committee members also left unchanged their statement they plan to hold the target interest rate near zero as long as unemployment stays above 6.5 percent and inflation is no more than 2.5 percent.

“Taking into account the fragile economic situation, the Fed has to continue its accommodative policy,” said Hiromasa Nakamura, a senior investor at Mizuho Asset Management Co. in Tokyo, which oversees the equivalent of $35 billion. “U.S. Treasury yields will decline this year,” said Nakamura, who sees the 10-year rate at 1.2 percent by Dec. 31.

The Fed is scheduled to buy as much as $3.5 billion of Treasuries maturing between February 2020 and November 2022 today, according to the Fed Bank of New York’s website.

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