Treasury 10-year notes rose for a fourth day in the longest stretch of gains since June as traders speculated that the Federal Reserve is preparing to increase purchases of U.S. debt. The yield on the two-year note touched a record low for a second day after the Fed said yesterday it’s “prepared to provide additional accommodation if needed to support the economic recovery.” The central bank is scheduled to buy Treasuries maturing from March 2013 to August 2014 today as part of its effort to keep borrowing costs low. “There is an underlying bid in the market as the bull trend in Treasuries remains intact,” said Martin Mitchell, head government bond trader in Baltimore at Stifel Nicolaus & Co., a brokerage firm. “The Fed has tipped their hand that they are likely to initiate a larger-scale asset-purchase program in the future. If the Fed becomes a larger buyer, the Treasury market can only go higher.” The benchmark 10-year note yield dropped 3 basis points, or 0.03 percentage point, to 2.55 percent at 10:25 a.m. in New York, according to BGCantor Market Data. The price of the 2.625 percent security maturing in August 2020 gained 7/32, or $1.88 per $1,000 face amount, to 100 21/32. The 10-year note yield touched 2.52 percent, the lowest level since Sept. 1. The last time the yield fell for four days in a row was on June 30. The 2-year yield was at 0.43 percent after dropping earlier today to a record 0.41 percent. The 30- year bond yield dropped 2 basis points to 3.76 percent. Record Gold Gold for December delivery touched an all-time high of $1,296.50. The dollar dropped to the lowest level since March against the currencies of six major trading partners. The Standard & Poor’s 500 Index fell 0.2 percent. The Federal Housing Finance Agency’s seasonally adjusted monthly index for U.S. house prices for July was down 0.5 percent from its June value, the agency said in a statement on its website. The median forecast of 15 economists in a Bloomberg News survey was for a drop of 0.2 percent. “That puts another feather in the cap of the possibility of quantitative easing as it reflects the Fed’s concern about falling prices,” said Thomas Tucci, head of U.S. government bond trading in New York at Royal Bank of Canada, one of the 18 primary dealers that trade directly with the Fed. “The Treasury market should gravitate higher from here.” The 2-year note yield was 18 basis points above the upper end of the Fed’s target rate for overnight lending between banks. The spread was 17 basis points yesterday, the narrowest since Dec. 15, 2008, a day before the central bank reduced the benchmark to a range of zero to 0.25 percent. Fed ‘Accommodation’ The Fed said in its statement yesterday that it’s prepared “to provide additional accommodation if needed to support economic recovery and to return inflation, over time, to levels consistent with its mandate.” Consumer prices excluding food and energy increased in August for a fifth month at an annual rate of 0.9 percent, matching the slowest year-over-year rate of gains since 1966, the Labor Department said Sept. 17. The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the maturity known as the break-even rate, was 1.88 percentage points, compared with the five-year average of 2.11. The central bank will announce at its next meeting that it intends to buy at least $1 trillion of Treasuries, economists at Goldman Sachs Group Inc. led by Jan Hatzius in New York wrote in a report after the central bank’s statement was released. “A sizable asset purchase program will be implemented in coming months,” according to Goldman Sachs, a primary dealer. Debt Buying The Fed retained its stance from last month of keeping its portfolio of securities stable at about $2 trillion to keep money from draining out of the financial system. The central bank will likely purchase as much as $2.1 billion in Treasuries today, according to Wrightson ICAP, a Jersey City, New Jersey-based research unit of ICAP that specializes in U.S. government finance. The Fed has bought $28.102 billion of Treasuries since Aug. 17. The Fed completed a program to buy $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt in March. The Fed was the biggest buyer of Treasuries when it purchased $300 billion of U.S. debt in 2009. The 10-year note yield may fall to a record low of 1.75 percent should the Fed increase its purchase program, according to Hideo Shimomura, who helps oversee the equivalent of $58.9 billion in Tokyo as chief fund investor at Bank of Tokyo- Mitsubishi UFJ Ltd. The yield on the 10-year note reached a record low of 2.04 percent on Dec. 18, 2008, as the global financial crisis led to $1.81 trillion of losses and writedowns at banks and financial companies increased demand for the relative safety of U.S. debt. To contact the reporters on this story: Keith Jenkins in London at kjenkins3@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net

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