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Treasury Rally Halts Before $67 Billion Auctions as Gross Sells

Aug. 12 (Bloomberg) -- A Treasury-market rally that pushed benchmark yields to the lowest level in a year ground to a halt as investors prepared to bid for $67 billion of notes and bonds this week.

The U.S. plans to sell $27 billion of three-year securities today, $24 billion of 10-year debt tomorrow and $16 billion of 30-year bonds on Aug. 14. Treasuries jumped last week as unrest in Ukraine, Gaza and Iraq boosted demand for the safety of government debt. Bill Gross cut holdings of Treasuries and related debt in the world’s biggest bond fund in July, a report showed yesterday, amid speculation the Federal Reserve will raise interest rates next year as the economy improves.

“The rally has halted to some degree but it’s difficult to see why the market will start to turn around,” said Orlando Green, a fixed-income strategist at Credit Agricole SA’s corporate and investment banking unit in London. “Fundamentals suggest prices should be heading back down but there are these extraordinary events that are taking place at the moment in the Middle East and also in Europe. There are still external factors that may just keep the market encouraged to remain elevated.”

The benchmark U.S. 10-year yield was little changed at 2.43 percent at 7:37 a.m. New York time, according to Bloomberg Bond Trader data. The price of the 2.5 percent note maturing in May 2024 was 100 20/32. The rate dropped to 2.35 percent on Aug. 8, the lowest level since June 2013.

Growth Rebound

Credit Agricole forecasts 10-year yields will increase to 3.25 percent by year-end on bets the Fed will end monetary loosening and economic fundamentals will improve, Green said.

This week’s auctions will reveal the extent of investor appetite for U.S. government debt amid signs the economy is strengthening. Growth rebounded last quarter from the biggest contraction in five years, the Commerce Department reported last month. Job openings in the U.S. were close to a seven-year high in June, and optimism among small businesses rose in July, based on Bloomberg News surveys of economists before the reports today.

There’s about an 80 percent chance the Fed will raise its benchmark, the target for overnight loans between banks, to at least 0.5 percent by October next year, futures trading shows.

Bear Case

“The price of bonds has decoupled from economic reality,” said Bill Bovingdon, chief investment officer at Altius Asset Management Pty in Sydney. “The U.S. economy’s looking really good. Bond yields in particular definitely have to go up.” Altius oversees the equivalent of $508 million in assets.

The 10-year yield will probably rise to 3 percent by year- end, Altius’s Bovingdon said.

The Bloomberg U.S. Treasury Bond Index returned 3.9 percent this year through yesterday, while the MSCI All-Country World Index of shares gained 4.6 percent, including reinvested dividends.

Gross cut U.S. government-related debt in his $223 billion Total Return Fund at Pacific Investment Management Co. to 45 percent of assets last month from 47 percent in June, according to data on the company’s website.

He increased non-U.S. developed debt to 17 percent, the most since December 2011, from 16 percent, the data showed.

Pimco, a unit of the Munich-based insurer Allianz SE, is based in Newport Beach, California. The company’s U.S. government-related category includes Treasury notes, bonds, agency debt, interest-rate swaps and inflation-protected securities.

Past Sales

The three-year notes due to be sold today yielded 0.925 percent in pre-auction trading. The previous auction of three- year notes on July 8 drew bids for 3.38 times the amount offered. The average for the past 10 sales of this maturity including last month’s is 3.35.

Direct bidders, those companies buying for themselves instead of going through the Fed’s underwriting system, bought 12.7 percent of the securities, the least at the monthly sales this year. Indirect bidders, the investor class that includes central banks outside the U.S., purchased 38.2 percent, the most since February.

Treasuries are attractive even after last week’s rally, said Yusuke Ito, a bond investor in Tokyo at Mizuho Asset Management Co., which oversees the equivalent of $39.1 billion.

“We are heavily overweight the U.S,” he said. “We are very, very ready for further gains. Deflationary pressures are still there.”

Wages are helping keep inflation in check, he said.

Average hourly earnings in the U.S. increased 2 percent in July from a year earlier, failing to recover from the recession that began in December 2007 and ended in June 2009. Growth was as high as 3.6 percent in 2008.

To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@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

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