By Susanne Walker and Daniel Kruger Nov. 25 (Bloomberg) -- Treasuries gained as the Federal Reserve’s pledge to keep interest rates near record lows drove stronger-than-forecast demand at a record $32 billion seven-year note auction. Seven-year note yields touched the lowest level in almost two months as the securities sold today drew a yield of 2.835 percent, the lowest since April and below the forecast of 2.878 percent in a Bloomberg News survey of eight of the Federal Reserve’s 18 primary dealers. The Fed said in minutes released yesterday of its November meeting that interest rates would remain near zero “for an extended period” as long as inflation expectations are stable and unemployment fails to decline. “It was a spectacular auction,” said Ray Remy, head of fixed income in New York at Daiwa Securities America Inc., one of the primary dealers required to bid at Treasury auctions. “There was great demand for Treasuries. Clearly the stock market is telling you the economy is coming out, and the bond market is telling you something very different.” The yield on the current seven-year note fell six basis points, or 0.06 percentage point, to 2.74 percent at 4:15 p.m. in New York, according to BGCantor Market Data. That’s the lowest level since Oct. 2. The 3.125 percent security maturing in October 2016 rose 3/8, or $3.75 per $1,000 face amount, to 102 12/32. Ten-year note yields fell four basis points to 3.26 percent, the lowest since Oct. 9. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.76. The average at the nine sales since the security was reintroduced in February was 2.53. The last auction, a $31 billion offering Oct. 29, drew a yield of 3.141 percent, which was the highest since July. The bid-to-cover ratio was 2.65. ‘Outstanding Auction’ Indirect bidders, a class of investors that includes foreign central banks, purchased 62.5 percent of the notes. At the October sale, they bought 59.3 percent, higher than the average for the previous eight sales of 48.2 percent. “It was an outstanding auction,” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities in New York. “There’s a lot of cash lying around. People are looking for safety. They want to put it into something that’s safe and this is a reflection of that.” Government securities fell earlier as initial jobless claims dropped last week to the lowest level since September 2008. The number of Americans filing claims for unemployment benefits fell to 466,000, more than forecast, in the week ended Nov. 21. Continuing claims declined by 190,000 in the week ended Nov. 14 to 5.423 million. They were forecast to drop to 5.57 million. Inflation Gauge “This doesn’t change things as far as expecting hikes in the first half of the year, but if this trend were to continue and we do get above-trend growth, as we expect, we think the Fed will start to remove accommodation by the second half of next year,” said Michael Pond, an interest-rate strategist in New York at primary dealer Barclays Plc. Spending by U.S. consumers increased 0.7 percent, according to Commerce Department figures, above the 0.5 percent median forecast in a Bloomberg News survey. The report showed prices were stabilizing. The Fed’s preferred price measure, which excludes food and fuel, climbed 0.2 percent in October from the previous month and was up 1.4 percent from a year earlier. ‘Remain Alert’ Today’s sale was the last of three this week totaling $118 billion. Yesterday’s $42 billion five-year note auction drew a yield of 2.175 percent, compared with a Bloomberg survey forecast of 2.208 percent. A $44 billion two-year note sale on Nov. 23 drew a yield of 0.802 percent, the lowest ever. Treasuries of all maturities gained 0.8 percent so far in November, according to indexes compiled by Merrill Lynch & Co. The securities have handed investors a loss of 1.7 percent so far this year, as measured by indexes compiled by They are heading for the first loss since 1999, as President Barack Obama borrows record amounts to fund spending programs and service deficits. U.S. marketable debt totaled $6.95 trillion in October, after climbing to a record $7.01 trillion in September. The Fed meeting minutes showed that while policy makers agreed the chances of excessive risk-taking and a dislodging of expectations for low inflation were “relatively low, they would remain alert to these risks.” The Fed raised its forecast for 2010 growth yesterday to a range of 2.5 percent to 3.5 percent, from 2.1 percent to 3.3 percent. “Most members projected that over the next couple of years, the unemployment rate would remain quite elevated and the level of inflation would remain below rates consistent over the longer run with the Federal Reserve’s objectives,” the minutes said. Policy makers indicated the benchmark lending rate would remain near zero “for an extended period” as long as inflation expectations are stable and unemployment fails to decline. The earliest policy makers will increase borrowing costs is in the third quarter of next year, according to a Bloomberg survey. To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net.

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