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Treasuries Rise First Time in Four Days Before 10-Year Auction

June 11 (Bloomberg) -- Treasuries rose for the first time in four days as the backup in yields raised the allure of the $21 billion in 10-year notes to be sold today at auction.

Yields on the benchmark securities had climbed to a four- week high of 2.66 percent, compared with a yield of 2.61 percent at the last sale of the maturity on May 7. Traders are willing to pay to borrow the notes in the repurchase-agreement market in exchange for lending cash overnight for the most actively traded 10-year maturity, with rates opening today at negative 2.90 percent, according to data from ICAP Plc tracked by Bloomberg.

“People are playing the market from a defensive stance and buying Treasuries,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “Ten-year yields got as high as 2.66 percent -- that might have brought in sidelined investors looking to take advantage of higher yields.”

The 10-year note maturing in May 2024 yielded 2.63 percent, or down two basis points, at 8:08 a.m. New York time, according to Bloomberg Bond Trader data. The price of the 2.5 percent notes rose 5/32, or $1.56 per $1,000 face value to 98 28/32. The yield earlier rose to 2.66 percent, the highest since May 12.

Treasuries fell yesterday as an auction of three-year notes drew a yield of 0.93 percent, the highest since May 2011, and an industry gauge of small-business optimism climbed to the most since 2007.

Bond Bears

“Yesterday’s releases provided more fuel for the bond bears,” Jim Reid and Anthony Ip, strategists at Deutsche Bank AG in London and Sydney, wrote in an e-mailed note today. “There also seems to be a growing chorus of market participants who think that we’re starting to see a gradual shift in the Fed’s tone given the recent run of stronger U.S. economic data. The conclusion to this debate could be one of the most important themes” for the second half, they wrote.

U.S. reports tomorrow and the following day will show retail sales rose in May, initial claims for jobless insurance were little changed in the latest weekly report and consumer confidence improved in June, based on Bloomberg surveys.

“There’s much more room for yields to go up” in the U.S., said Yoshiyuki Suzuki, head of fixed income in Tokyo at Fukoku Mutual Life Insurance Co., which has the equivalent of $59.2 billion in assets. “The U.S. economy is very strong.”

Fed Tapering

The Fed is reducing its monthly asset purchases, while keeping the target for overnight lending between banks in a range of zero to 0.25 percent. Policy makers signaled at their April 29-30 meeting that interest rates will stay low for a “considerable time.” They next meet on June 17-18.

The chance of a rate increase to 0.5 percent or more by March 2015 is 17 percent, according to Bloomberg-compiled data based on federal fund futures. The odds of a boost by December of next year are 73 percent.

Investors at the previous 10-year auction in May bid for 2.63 times the amount of debt available, down from 2.76 times on April 9. The notes being sold today yielded 2.65 percent in pre- auction trading.

Ten-year notes are in short supply in the market for borrowing and lending securities, which suggests investors will buy at today’s auction, said John Gorman, head of dollar- denominated interest-rate products for Asia at Nomura Holdings Inc. in Tokyo. The company is one of the 22 primary dealers that underwrite the U.S. debt.

Repo Market

“There’s really strong demand for the 10-year,” Gorman said. “Just because there’s a strong repo demand right now, the auction will probably go well today because a lot of people do need the 10-year notes.”

There may be demand from investors who are trying to unwind bets against Treasuries, Gorman said. At the same time, investors holding the securities may not want to lend them out, he said.

The government plans to conclude this week’s sales with a $13 billion auction of 30-year bonds tomorrow.

The Bloomberg Global Developed Sovereign Bond Index has returned 3.7 percent this year, compared with a loss of 4.6 percent in 2013.

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