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U.S. 30-year yield near 11-month low on Yellen inflation outlook

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(Bloomberg) — Treasury 30-year yields were close to the lowest level in 11 months after Federal Reserve Chair Janet Yellen told U.S. lawmakers yesterday inflation and employment were short of the central bank’s goals.

Ten-year notes were little changed as Yellen prepared for a second day of testimony to Congress and Philadelphia Fed Bank President Charles Plosser urged the central bank to clarify the likely path of interest rates. The Treasury will sell $16 billion of 30-year bonds today. The outlook for slow inflation combined with safety demand amid unrest in Ukraine drove returns for long bonds to 12 percent this year through yesterday, Bank of America Merrill Lynch indexes show. The Standard & Poor’s 500 Index earned 2.3 percent including reinvested dividends.

“Yields are where they are because some in the market assume inflation is under control and rates won’t go up any time soon,” said Fabrizio Fiorini, chief investment officer at Aletti Gestielle SGR SpA in Milan. “I think the market is complacent and the Fed is arguably behind the curve. At one point, yields will have to rise much further from here.”

The 30-year yield was little changed at 3.40 percent at 8:14 a.m. in New York, according to Bloomberg Bond Trader data. The price of the 3.625 percent bond maturing in February 2044 was 104 1/4. The yield fell to 3.35 percent on May 5, the lowest since June 19. The benchmark 10-year yield was also little changed, at 2.61 percent.

Annual Return

Treasuries returned 2.7 percent this year through yesterday, according to Bloomberg World Bond Indexes. U.K. gilts and German securities both earned 3.2 percent.

Plosser, in a speech in New York, called on the policy- setting Federal Open Market Committee to improve its public communication on interest rates.

The yield curve flattened last month amid bets longer-term bonds will benefit from the outlook for slow inflation, while shorter maturities will be hurt by expectations for the Fed to raise interest rates next year.

The difference between five- and 30-year yields contracted to 1.68 percentage points on May 2, the narrowest since September 2009. The spread increased five basis points, or 0.05 percentage point, to 1.75 percentage points yesterday after Yellen said the economy still needs help from the central bank. It was little changed today. Yellen Testimony

Yellen in her testimony to lawmakers yesterday highlighted weaknesses in the labor market, such as the number of long-term unemployed, even as the economic outlook improves.

“A high degree of monetary accommodation remains warranted,” she told the Joint Economic Committee of Congress in Washington. “Many Americans who want a job are still unemployed,” and inflation is below the central bank’s 2 percent target, she said.

The difference between yields on 10-year notes and similar- maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt, was little changed today at 2.17 percentage points. The average for the past decade is 2.21.

The 30-year bonds due to be sold today yielded 3.415 percent in pre-auction trading. Investors at the previous 30- year sale on April 10 submitted bids for 2.52 times the amount of debt available, up from 2.35 times in March.

Demand declined at a $24 billion sale of 10-year notes yesterday after increasing at a $29 billion three-year auction the previous day.

The Labor Department’s weekly report today on initial claims for jobless insurance will show a decline to 325,000 from 344,000, according to a Bloomberg News survey of economists.

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