Treasuries rose, eroding a weekly decline, amid speculation a speech on monetary policy by Federal Reserve Chairman Ben S. Bernanke will indicate the central bank plans to increase Treasury purchases to sustain growth. Ten-year yields fell from yesterday’s levels, the highest in more than a week, amid preparations by the Fed to buy notes today as part of its plan to keep borrowing costs low. A government report today will show an inflation gauge held at a four-decade low last month, according to analysts in a Bloomberg survey, a potential spur for further Fed quantitative easing. “The market’s on tenterhooks that Bernanke may push the pendulum toward more QE,” said Orlando Green, assistant director of capital-markets strategy at Credit Agricole Corporate & Investment Bank in London. “That’s going to keep the market supported until he speaks.” Benchmark 10-year yields fell one basis point, or 0.01 percentage point, to 2.50 percent as of 7:12 a.m. in New York, according to data compiled by Bloomberg. The 2.625 percent security maturing in August 2020 rose 2/32, or 63 cents per $1,000 face amount, to 101 3/32. The yield rose from 2.40 percent at the end of last week. Speculation the Fed will buy more Treasuries to boost the economy has been mounting since Bernanke said on Oct. 4 that restarting large-scale asset purchases would probably spur growth. The Fed purchased $300 billion of Treasuries in 2009 and minutes of the central bank’s last policy meeting on Sept. 21 showed officials discussed several ways to provide additional support for the economy, focusing mainly on increased purchases of longer-term Treasuries. Fed policy makers next meet Nov. 2-3. QE2 Risk Traders are preparing for another round of buying, which they’ve dubbed QE2. “The risk is that some form of QE2 is announced by the Fed and yields fall sharply,” Jim Caron, the head of global interest rate strategy at Morgan Stanley in New York, wrote in a report yesterday. “We are looking to buy on a corrective move to higher yields.” The Fed plans to buy Treasuries due from October 2014 to September 2016 today, according to its website. It will be the first of $32 billion in purchases from today through Nov. 8 as the central bank reinvests proceeds from its holdings of maturing mortgage bonds into government securities. Consumer prices excluding food and energy rose 0.9 percent in September from the year before, according to the median forecast in a Bloomberg News survey of economists before the Labor Department reports the figure today. The gauge has held at that level, the least in 44 years, since April. Retail Sales Overall prices rose 0.2 percent in September from 0.3 percent in August, the survey shows. A separate report today will reveal retail sales in the U.S. increased in September for a third month, economists said. Treasuries headed for their first weekly loss in a month, with 10-year yields rising 10 basis points, as some investors bet economic growth will lead to faster inflation, and demand weakened at debt auctions this week. The difference between rates on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, widened to 2.18 percentage points yesterday, the most since May. The gap narrowed two basis points to 2.12 percent today. Thirty-year bonds, those most sensitive to inflation because of their long maturities, are lagging behind the rest of the market. The spread between five- and 30-year yields reached to 2.75 percentage points today, the most since at least 1977, when Bloomberg data tracking the figures. Debt Auctions A $13 billion 30-year sale yesterday drew a yield of 3.852 percent, higher than the average forecast of 3.831 percent in a Bloomberg News survey of six of the Fed’s 18 primary dealers, those companies authorized to trade directly with the central bank. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount offered, was 2.49, the lowest since February. “QE is now a done deal in people’s minds,” said Mark Schofield, head of interest-rate strategy at Citigroup Inc. in London. “The market is fully pricing in QE but doesn’t know what it’s going to look like yet. The poor auctions reflect the fact that demand is waning.” To contact the reporters on this story: Paul Dobson in London at pdobson2@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net. To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net.

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