Treasury 30-year bonds yielded a record 1.40 percentage points more than 10-year notes on speculation the Federal Reserve will buy medium-term debt as it tries to keep borrowing costs down. The longest maturities, those most sensitive to inflation, also lagged behind shorter-term notes after the Fed said it is prepared to ease monetary policy to keep costs in the economy from falling. Anthony Crescenzi, a strategist at Pacific Investment Management Co., said long-term bonds are losing their attraction. The Treasury is scheduled to sell $21 billion of 10- year notes today and $13 billion of 30-year bonds tomorrow. “A lot of the consumer-credit rates are priced off yields on Treasuries in the five- to 10-year bucket,” said Andy Cossor, the Hong Kong-based chief market strategist for Asia at DZ Bank AG, Germany’s fifth-largest lender. The Fed may “concentrate some of its firepower” on those tenors. Ten-year yields, a benchmark for everything from home mortgages to corporate bonds, were 2.42 percent at 6:53 a.m. in London, according to BGCantor Market Data. The 2.625 percent note due in August 2020 traded at a price of 101 25/32. The rate dropped to 2.33 percent on Oct. 8, the least since January 2009. Thirty-year bonds yielded 3.82 percent. The difference between the two rates was the most since Bloomberg started tracking the figures in 1977. Ten-year yields will climb to 3.50 percent and 30-year rates will advance to 4.20 percent by year-end, Cossor said. “The market certainly doesn’t think that” 30-year bonds will be purchased, said Ira Jersey, an interest-rate strategist in New York at Credit Suisse Group AG, one of 18 primary dealers that trade directly with the Treasury. Pimco’s Strategy Long maturities don’t have the attraction that they used to, said Pimco’s Crescenzi, whose company runs the world’s biggest bond fund. Thirty-year bonds have a greater duration, a gauge of sensitivity to changes in yield, than shorter-term debt, meaning their prices will fall more if rates rise. “You can’t do what investors have done for 30 years and ride the duration tailwind and buy the longest maturity possible,” Crescenzi, who is based in Newport Beach, California, said in an interview yesterday. “You have to be very active, professional and expert and pick these various segments of the market” that offer the best value. Ten-year Treasuries have returned 3 percent in the past month, versus 1.2 percent for 30-year bonds, according to Bank of America Merrill Lynch indexes. ‘Before Long’ The central bank’s policy-setting Federal Open Market Committee last month was prepared to ease monetary policy “before long” and focused on purchases of Treasuries and boosting inflation expectations as ways to add stimulus. “Many participants noted that if economic growth remained too slow to make satisfactory progress toward reducing the unemployment rate or if inflation continued to come in below levels consistent with the FOMC’s dual mandate, it would be appropriate to provide additional monetary policy accommodation,” the Fed said in minutes of the Sept. 21 session, released yesterday in Washington. The Fed also said for the first time that it was considering targeting a path for the level of nominal gross domestic product to increase price expectations. The spread between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, widened to 1.96 percentage points from this year’s low of 1.47 percentage points in August. The five-year average is 2.10 percentage points. The 10-year securities scheduled for sale yielded 2.44 percent in pre-auction trading, compared with 2.67 percent the last time the notes were sold on Sept. 8. Mortgage Rates Investors bid for 3.21 times the amount of debt on offer last month, versus the average of 3.10 for the past 10 auctions. Indirect bidders, the group that includes foreign central banks, bought 54.7 percent of the debt, rising from the 10-sale average of 40 percent. The Fed has already purchased about $1.75 trillion of Treasury and mortgage-related debt to sustain the recovery, concluding the program in March. A year earlier, the central bank explained in a statement that it aimed to support the mortgage lending and housing markets and to improve conditions in private credit markets. U.S. 30-year fixed mortgage rates fell to 4.21 percent this month, according to Bankrate.com in North Palm Beach, Florida, the least since the company’s data tracking the figure started in 1998. The rate is 1.93 percentage points more than 10-year Treasury yields, widening from 1.22 percentage points in March. The average over the past year is 1.58 percentage points. An index of U.S. corporate bonds yields 2.74 percentage points more than Treasuries, narrowing from 3.46 percentage points 12 months ago, Bank of America indexes show. To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net. To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.

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