Treasuries gained, with longer-term debt leading advances, as traders speculated the Federal Reserve will increase purchases of U.S. debt to boost the economy. Bonds also rose as Anglo Irish Bank Corp.’s senior debt was cut to the lowest investment grade rating by Moody’s Investors Service, encouraging demand for safety. The Fed will buy inflation-indexed debt tomorrow maturing from January 2011 to February 2040 as part of its program to reinvest principal payments from its mortgage holdings. “Quantitative easing is a background factor which continues to contain any major attempts to sell off and has effectively put a floor into the Treasury market in the near term,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “There’s continued sovereign debt-related concerns overseas as we watch the banking situation develop in Ireland.” The 10-year note yield dropped 7 basis points, or 0.07 percentage point, to 2.54 percent at 11:10 a.m. in New York, according to BGCantor Market Data. The price of the 2.625 percent security maturing in August 2020 increased 5/8, or $6.25 per $1,000 face amount, to 100 3/4. Two-year note yields were within 2 basis points of a record low as the Treasury prepared to sell $36 billion of the debt today, compared with $37 billion in August. The Treasury is scheduled to auction $35 billion of five-year debt tomorrow and $29 billion in seven-year securities the following day. ‘Fairly Robust’ “Demand for Treasuries will remain fairly robust despite the amount of supply hitting the market this week,” Kevin Giddis, head of fixed-income sales, trading and research in Memphis, Tennessee, at the brokerage firm Morgan Keegan Inc., said in a research note. The economy remains weak, and the Fed appears poised to intensify asset purchases, he wrote. The Fed said in its statement after its Sept. 21 meeting 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 pace of gains since 1966, the Labor Department said Sept. 17. The difference between yields on 10-year notes and Treasury Inflation Protected Securities, or TIPS, a gauge of trader expectations for consumer prices over the life of the maturity known as the break-even rate, fell to 1.79 percentage points, compared with the five-year average of 2.10 percentage points. Deutsche Bank View About $315 billion to $670 billion of quantitative easing has been priced in by the market, a team of Deutsche Bank AG analysts including Dominic Konstam and Mustafa Chowdhury in New York wrote in a note to clients issued Sept. 24. The Fed completed a program of quantitative easing in March, purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. The central bank was the biggest buyer of Treasuries when it bought $300 billion of U.S. debt in 2009. The central bank retained last week its stance from its Aug. 10 meeting of keeping its portfolio of securities stable at about $2 trillion to keep money from draining out of the financial system. The Fed bought $3.89 billion of Treasuries on Sept. 24 maturing from September 2014 to August 2016, increasing the amount it has bought since Aug. 17 to $34.062 billion. A range of 2.50 percent to 2.70 percent for the 10-year note yield will probably hold until traders “get in touch with their feelings” on the probability of full-scale quantitative easing, Jim Vogel, head of agency-debt research at FTN Financial in Memphis, wrote in a note to clients. Two-Year Yield The two-year note yield dropped 1 basis point today to 0.43 percent, compared with the record of 0.41 percent touched Sept. 22. The 30-year bond yield slid 7 basis points to 3.72 percent. Yields on two-year notes were 18 basis points more than the upper level of the Fed’s target range for overnight lending between banks. The spread narrowed to 16.95 basis points on Sept. 21, the least since Dec. 15, 2008, the day before the Fed lowered its target to a range of zero to 0.25 percent. This year’s rally in Treasuries has pushed yields so low that a Fed measure of risk shows U.S. government securities are too expensive. The financial model, which includes expectations for interest rates, growth and inflation, shows Treasuries are the most overvalued since the financial crisis in December 2008, just before 10-year note yields almost doubled in the following six months. Investors who held 10-year securities through that period lost 13 percent, according to Bank of America Merrill Lynch index data. The two-year notes being sold today yielded 0.46 percent in pre-auction trading, compared with the prior record low of 0.498 percent at the previous auction on Aug. 24. Investors bid for 3.12 times the amount on offer last month, versus an average of 3.14 for the past 10 sales. Indirect bidders, the category including foreign central banks, bought 29.2 percent of the notes, compared with the 10-sale average of 38.1 percent. To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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