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Treasuries Fall Before Auctions as Recovery Supports Fed Taper

Jan. 8 (Bloomberg) -- Treasuries fell for the first time in three days before the U.S. sells $21 billion of 10-year notes and as signs the economic recovery is gathering pace spurred bets the Federal Reserve will keep reducing debt purchases.

Benchmark yields climbed from near the lowest level in two weeks before the Fed releases the minutes of its December meeting when it announced plans to cut bond buying starting this month. Economists say data this week will show U.S. employers added fewer workers last month, while the jobless rate stayed at a five-year low. The three-year yield rose to the highest since September after a $30 billion auction of the securities yesterday attracted the least demand since October.

“It’s a bit of wait and see before the labor-market report,” said Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich. “The general assumption is that the economy will continue to improve gradually” and the 10-year yield will hold at about 3 percent until the end of the first quarter, he said.

The U.S. 10-year yield rose two basis points, or 0.02 percentage point, to 2.96 percent at 7:31 a.m. New York time, according to Bloomberg Bond Trader prices. The 2.75 percent note due in November 2023 fell 5/32, or $1.56 per $1,000 face amount, to 98 1/4. The yield dropped to 2.94 percent yesterday, the lowest since Dec. 24.

The 10-year yield will climb to 3.15 percent by June 30, widening the spread over the two-year rate to 2.61 percentage points, according to Bloomberg surveys of analysts with the most recent forecasts given the heaviest weighting. The gap was 2.55 percentage points today.

‘Steeper’ Curve

“The bond market continues to expect Treasury yields to rise, with a bias toward a steeper yield curve until the Federal Reserve raises short-term rates,” Vanguard Group Inc. economists including Joe Davis and Roger Aliaga-Diaz in Malvern, Pennsylvania, wrote in a research report yesterday. “The macroeconomic environment justifies a 10-year yield in the range of 2.75 percent to 3.75 percent at present.”

Employers added 195,000 workers in December, down from 203,000 the previous month, economists in a Bloomberg News survey forecast before the Labor Department reports the figure Jan. 10. The unemployment rate will remain at 7 percent, a separate survey showed.

The 10-year notes scheduled for sale today yielded 2.97 percent in pre-auction trading, compared with 2.824 percent at the previous sale on Dec. 11. Investors bid for 2.61 times the available debt last month, down from 2.7 times in November.

Indirect Bidders

Indirect bidders, a class of investors that includes foreign central banks, bought 48.9 percent of the notes at last month’s sale, the most since June. Direct bidders, non-primary- dealer investors that place their bids directly with the Treasury, bought 10.6 percent, the least since August 2012.

The Treasury is scheduled to complete this week’s sales with a $13 billion auction of 30-year bonds tomorrow.

Treasuries rose yesterday as Fed Bank of Boston President Eric Rosengren said the central bank should cut stimulus “only very gradually” as the economy recovers. Rosengren dissented from the Fed’s decision last month to taper its bond purchases, citing elevated unemployment and an inflation rate that is less than the central bank’s target.

“I preferred to wait before beginning the program, but the program it looks like we’re embarked on is a very gradual program and I think a gradual removal of accommodation is appropriate,” he said yesterday in an interview with Bloomberg.

The Fed’s preferred gauge of inflation climbed 0.9 percent in November from the year before. It has been below the central bank’s target of 2 percent for 19 months. The Treasury 10-year yield climbed to 3.05 percent on Jan. 2, the highest level since July 2011.

“Ten-year bonds are looking more attractive after yields reached 3 percent,” said Kazuaki Oh’e, a debt salesman at CIBC World Markets Japan Inc. in Tokyo. “The low inflation rate is supportive of the Treasury market.”

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