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Treasuries Snap Three-Day Gain Before $64 Billion of Debt Sales

April 8 (Bloomberg) -- Treasuries snapped a three-day gain, with 10-year yields rising from almost the lowest in a week, before the U.S. auctions $64 billion of coupon-bearing securities during three days starting today.

The Federal Reserve is scheduled to publish the minutes of its March meeting tomorrow, after making a third cut to the debt-purchase program it uses to support the economy. The Treasury plans to sell $30 billion of three-year notes today, $21 billion in 10-year debt tomorrow and $13 billion of 30-year bonds on Thursday. The yield difference, or spread, investors demand to hold 30-year bonds over five-year notes widened yesterday after shrinking to 178 basis points on March 31, the narrowest since October 2009.

“The auctions will go well,” said Soeren Moerch, head of fixed-income trading at Danske Bank A/S in Copenhagen. “The five- to 30-year curve flattened 40 basis points this year, so 30 years are not attractive for me.” Moerch said he prefers three- and 10-year debt. A basis point is 0.01 percentage point.

U.S. 10-year yields were little changed at 2.70 percent as of 7:32 a.m. in New York, according to Bloomberg Bond Trader data. The yield fell to 2.68 percent yesterday, the lowest since March 28. The price of the 2.75 percent note due in February 2024 was 100 13/32.

Fed policy makers at their March 18-19 meeting reduced monthly bond purchases by $10 billion to $55 billion. Fed Chair Janet Yellen said the central bank may start to increase interest rates “around six months” after ending its asset- buying program.

Fed Expectations

Futures contracts indicate traders expect the Fed to raise interest rates by September 2015 as the economy improves.

The Fed has kept its target for overnight lending between banks in a range of zero to 0.25 percent since 2008. The implied yield on 30-day federal funds futures contracts expiring in September 2015 was 0.505 percent, indicating investors expect the target to be higher by then.

The three-year notes scheduled to be sold today yielded 0.91 percent in pre-auction trading, versus 0.802 percent at a previous auction on March 11, the highest rate since September.

Last month’s auction drew bids for 3.25 times the amount offered. Primary dealers, those companies that underwrite the U.S. debt, purchased 54.6 percent of the securities, the most since June at the monthly auctions.

Bond Returns

Three-year Treasuries have returned 0.2 percent this year through yesterday, according to Bank of America Merrill Lynch indexes. Ten-year notes gained 3.7 percent, and 30-year bonds earned 8.3 percent, the data show.

Treasuries rose yesterday as investors bet jobs growth is slow enough to deter the Fed from accelerating cuts in its bond- purchase program. U.S. debt extended a rally from April 4 when a report showed employers added 192,000 jobs last month, less than the 200,000 projected by a Bloomberg News survey of economists.

Data today will show job openings in the U.S. increased in February, a Bloomberg survey showed.

Yusuke Ito, a senior fund manager in Tokyo at Mizuho Asset Management Co., said he prefers Treasuries due in 10 years and more, the longest part of the range of maturities known as the yield curve.

“Inflation pressures are very weak, and that’s going to drive the longer end of the curve down,” he said. Mizuho has the equivalent of $38.9 billion in assets.

The difference between yields on 10-year notes and similar- maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, was little changed at 2.13 percentage points. The average over the past decade is 2.21 percentage points.

Fed Bank of St. Louis President James Bullard said yesterday that he continues “to worry about low inflation,” which “has been a surprise.”

Inflation “bottomed out in the last nine months or so and it is poised to go higher” toward the central bank’s 2 percent target, Bullard said, answering audience questions after a speech in Los Angeles.

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Eshe Nelson in London at enelson32@bloomberg.net To contact the editors responsible for this story: Paul Dobson at pdobson2@bloomberg.net Keith Jenkins, Paul Cox

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