Auction to serve as ‘referendum’ on Fed expectations, Nomura says By Deborah Levine, MarketWatch NEW YORK (MarketWatch) — Treasury prices slipped on Wednesday, pushing yields higher, as traders prepare for the government’s sale of 30-year bonds, the last auction of the week. The auction could benefit from rising expectations that the Federal Reserve may announce as soon as next week that it will shift its bond holdings in favor of longer-dated securities. Yields on 10-year notes 10_YEAR +0.15% , which move inversely to prices, rose 1 basis point to 2.01%. A basis point is 1/100th of a percentage point. Thirty-year bond yields 30_YEAR +0.48% increased 2 basis points to 3.35%. Yields on 2-year notes 2_YEAR -14.95% , more or less pinned by the Fed’s promise to keep interest rates low until 2013, were little changed at 0.21%. The Treasury Department will sell $13 billion in 30-year bonds at 1 p.m. Eastern time. The auction is a reopening, meaning the debt sold will carry the same coupon and maturity date as the originally issued securities, in this case sold in August. The Federal Open Market Committee, the policy-setting arm of the Fed, is meeting next week. More analysts and investors expect the FOMC to say it will extend the average maturity of its bond portfolio — all the debt it bought during the first two rounds of quantitative easing — by purchasing longer-dated debt and letting shorter-dated notes mature, or possibly sell them. That would be similar to a program that the Fed employed decades ago called Operation Twist. The objective would be to further lower long-term rates — the benchmark for corporate and consumer borrowing costs, including mortgage rates — in an effort to support economic growth. “The auction should provide a referendum on market expectations for Operation Twist,” said bond strategists at Nomura Securities, led by George Goncalves. “With the FOMC announcement exactly a week away, this could be the last opportunity for those looking for Fed long-end buying to buy in size.” Also in the auction’s favor, 30-year yields are far from their record low while the other maturities sold this week — 3-year 3_YEAR -8.54% and 10-year notes — came at all-time lows. Read story on 10-year auction at record-low yield. At 3.35% currently, 30-year yields are near the lowest since January 2009. But the all-time low around 2.57% was touched in December 2008, according to FactSet Research. “The likelihood of sticker-shock is lower,” Goncalves said. Bonds briefly pared gains following a Wednesday report that showed U.S. retail sales were flat last month, disappointing expectations for a small increase. Separate data showed U.S. producer prices were also flat in August. See more on retail sales.

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