Slow US growth as yields hit record low

US TREASURY two-year notes rose yesterday, pushing yields to a record low, after Federal Reserve officials said economic growth is “considerably slower” and the Treasury’s sale of $32 billion in three-year notes drew stronger-than-average demand in the first note sale since Standard & Poor’s cut the US debt rating on August 5.

Yields on 10-year notes erased gains as policy makers left their target interest rate in a range of zero to 0.25% and pledged to keep it there through mid-2013.

The Federal Open Market Committee discussed a range of policy tools to bolster the economy and said it is “prepared to employ these tools as appropriate,” it said in a statement today in Washington. The notes drew a yield of 0.5%, a record low at auction. The bid-to-cover ratio, a gauge of demand was 3.29, compared with an average of 3.15 for the past 10 sales.

“It’s pretty amazing that the Fed will be exceptionally low until 2013,” said Jason Rogan, director of US government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “They are telling you that we are in a stage of Japanese-like growth.”

Yields on two-year notes fell 10 basis points, or 0.10 percentage point, to 0.17% at 2:42 pm in New York, according to Bloomberg Bond Trader prices. The 0.325% securities maturing in July 2013 rose 6/32, or $1.88 per $1,000 face amount, to 100 13/32. The yield reached 0.1568%, lower than the previous record of 0.2283% yesterday.

Thirty-year bond yields rose six basis point to 3.71%. Benchmark 10-year yields fell two basis points to 2.30%.

The three-year note auction drew a yield of 0.5%, the lowest yield since records began in May 1981. It was less than the 0.523% average in a Bloomberg News survey of seven of the Fed’s primary dealers.

Indirect bidders, an investor class that includes foreign central banks, purchased 47.9% of the notes, the most since May 2010, compared with an average of 33.9% for the past 10 sales.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 11.1% of the notes at the sale, compared with an average of 13.2% for the past 10 auctions.

The offering is the first of three note and bond auctions this week totalling $72bn. The Treasury is to sell $24bn in 10-year debt tomorrow and $16bn of 30 year bonds on August 11.

Treasuries surged yesterday as tumbling stock markets sparked demand for the safety of government debt. S&P cut the US government’s AAA credit rating at the end of last week, while Moody’s Investors Service and Fitch Ratings have affirmed the US at the top rating.

Volatility in the Treasury market has picked up. Merrill Lynch & Co.’s MOVE index, which measure price swings in Treasuries based on prices of over-the-counter options maturing in two to 30 years, rose yesterday to 117.8.

Treasuries have returned 6.2% this year, according to indexes complied by Bloomberg and the European Federation of Financial Analysts Societies. Japan’s government bonds have gained 1.3%, while German bonds have returned 4.8%.