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The 2% level beckons for U.S. 10-year yields before Yellen talk

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(Bloomberg) — The Treasuries markets is refocusing on a return to the 2 percent yield level for 10-year notes before Federal Reserve Chair Janet Yellen gives a speech that may clarify the central bank’s thinking on interest rates.

Treasuries rose as an equities selloff spurred demand for havens, extending gains seen since the Federal Open Market Committee refrained from raising rates on Sept. 17, citing external risks. The benchmark 10-year note briefly traded below 2 percent last month amid global market turmoil following China’s currency devaluation. Prior to that, it last traded below 2 percent in April.

“With just one day of trading under 2.10 percent, the 10s can break the range since Aug. 27 and open 2.00-2.05 percent for sustained trading in October,” Jim Vogel, interest-rate strategist at FTN Financial Capital Markets, wrote in a note Thursday. “Post August and post FOMC, risk markets have not recovered the ability to weather even the smallest irritation without an immediate decline.”

U.S. 10-year note yields fell six basis points, or 0.06 percentage point, to 2.09 percent as of 10:10 a.m. in New York, touching the lowest on an intraday basis since Aug. 26, according to Bloomberg Bond Trader data. The 2 percent note due August 2025 rose 1/2, or $5.00 per $1,000 face amount, to 99 6/32.

Extending Gains

Treasuries extended gains as stocks declined amid mixed U.S. economic data, including a report that showed orders for non-military capital goods excluding aircraft fell 0.2 percent last month and another showing sales of new homes in the U.S. climbed 5.7 percent.

“It has to do more with a weakness with risky assets overnight, which is causing a rally here in the Treasuries market,” said Gary Pollack, who manages $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York. “Certainly, the economic news here this morning doesn’t help risky assets, and that’s fueling the rally.”

Yellen Speech

Yellen will deliver a speech on “Inflation Dynamics and Monetary Policy” at 5 p.m. in Amherst, Massachusetts. She won’t take questions, so it’s up to her to decide if she wants to guide market expectations by clarifying whether she was among the 13 of 17 officials who saw a rate rise as appropriate this year.

Fed officials including Atlanta Fed President Dennis Lockhart have argued in recent days that colleagues should still tighten policy this year. On the other hand, the odds of a rate increase by December have tumbled below 50 percent since last week’s policy meeting, according to futures prices.

“Yellen will need to correct the big mistake that she and her colleagues made at the last FOMC,” said Fabrizio Fiorini, chief investment officer at Aletti Gestielle SGR SpA in Milan. “The Fed has to raise rates to demonstrate they’re confident in the sustainability of U.S. growth.”

Seven-year Treasury notes climbed before the government auctions $29 billion of the securities. The spread between two- and seven-year yields was at 112 basis points, the lowest in a month.

A measure known as the butterfly spread showed how bets for the Fed’s first rate hike since 2006 are getting pushed further back amid slow inflation. Treasury five-year notes were near the most expensive level in 18 months relative to two- and 10-year securities. The spread between the yields was at eight basis points, after dipping to two basis points Wednesday, the lowest since March 2014.

The 10-year break-even rate, a market gauge of consumer- price expectations derived from the yield difference between Treasuries and inflation-protected securities, has fallen to 1.48 percent, the lowest on a closing basis since May 2009, from this year’s high of 1.97 percent reached in April.

–With assistance from Kevin Buckland in Tokyo.