July 21 (Bloomberg) -- Ten-year Treasury note yields traded near a three-week low on speculation Federal Reserve Chairman Ben S. Bernanke will tell lawmakers that borrowing costs will stay near zero.
Yields on two-year notes reached the fourth record low in five days as the U.S. prepared to announce tomorrow a round of two-, five- and seven-year note sales next week that is forecast to be smaller in size for the third straight month. Bernanke will give his semi-annual report on monetary policy to the Senate Banking Committee today and will testify at the House Financial Services Committee tomorrow.
“The market is frustrated, watching stocks, waiting to hear from a dovish Bernanke and staying in Treasuries,” said Paul Horrmann, a broker in New York at Tradition Asiel Securities Inc., an interdealer broker. “We seem to be at a standstill, waiting for direction.”
The benchmark 10-year note yield was at 2.96 percent at 9:22 a.m. in New York. It touched 2.89 percent yesterday, the lowest level since July 1, when it reached a 14-month low of 2.88 percent. The 3.5 percent security due in May 2020 traded at 104 19/32.
The two-year Treasury note yielded 0.58 percent. It touched 0.5682 percent, the lowest ever.
Two-year rates will climb to 1.03 percent and 10-year yields will be 3.32 percent by year-end, according to a Bloomberg survey of banks and securities companies, with the most recent forecasts given the heaviest weightings.
Yield Curve
The projected figures would narrow the difference between the two yields, known as the yield curve, to 2.29 percentage points from 2.37 percentage points today. The spread has declined from the record of 2.94 percentage points on Feb. 18.
The Treasury plans to auction $39 billion in two-year notes, $37 billion of five-year debt and $29 billion in seven- year securities on three consecutive days beginning July 27, according to the median estimate of seven primary dealers in a Bloomberg survey. The $105 billion compares with $108 billion of the notes sold last month and $113 billion sold in May.
Bernanke will emphasize the need to keep borrowing costs down when he appears before lawmakers today and tomorrow, analysts said.
The Fed chairman will reiterate the Fed’s plan to keep interest rates low for an “extended period,” Ajay Rajadhyaksha and Dean Maki at Barclays Plc in New York wrote to clients yesterday. The company is one of the 18 primary dealers that trade with the central bank and are required to bid at government debt sales.
Record Low
Policy makers have kept the target for overnight loans between banks in a record low range of zero to 0.25 percent since December 2008 as they try to maintain the economic expansion following a contraction last year.
“This is among the more important testimonies in some time, coming at an important time for the markets, the economy and the Federal Reserve,” Dan Greenhaus, chief economic strategist at Miller Tabak & Co. in New York, wrote in a note to clients. “There is no doubt that disinflation and deflationary concerns are paramount.”
Disinflation is a slowing in inflation, while deflation is a general drop in prices.
The gap between rates on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for inflation, narrowed to 1.73 percentage points from this year’s high of 2.49 percentage points in January. It touched 1.68 percentage points yesterday, the least since October.
Lowered Forecasts
U.S. central bankers at a meeting last month lowered their forecast for growth this year to a range of between 3 percent and 3.5 percent, from 3.2 percent to 3.7 percent in April, minutes showed. “A few participants cited some risk of deflation,” the central bank said.
The minutes also showed Fed banks in Dallas and Kansas City called for an increase in the so-called discount rate by a quarter-percentage point to 1 percent. The St. Louis Fed reversed its calls of April and May for higher rate, joining other nine regional Fed banks in requesting that the rate remain unchanged.
Initial jobless claims rose last week and existing home sales fell in June, Bloomberg News surveys forecast before reports tomorrow.
U.S. government securities have returned 6.2 percent in 2010, versus 4.1 percent for sovereign bonds globally, according to Bank of America Merrill Lynch indexes. The MSCI World Index of stocks has tumbled 6 percent.