Treasuries dropped, pushing two-year note yields up the most since April, after remarks from Federal Reserve Chairman Ben S. Bernanke tempered speculation that the central bank will step up debt buying.
The yield on 10-year notes increased this week for the first time in five weeks as Bernanke said yesterday at a conference in Wyoming that the central bank will provide additional economic stimulus as needed. Bernanke’s comments before next week’s payrolls figures exacerbated a decline in bonds sparked as a report showed U.S. growth slowed in the second quarter less than analysts expected.
“The Treasury market is giving up some of its gains of late,” said Ira Jersey, an interest-rate strategist in New York at Credit Suisse Group AG, one of the 18 primary dealers that trade directly with the central bank. “There was an expectation that he was going to prepare the market for additional quantitative easing.”
The yield on the 10-year note increased 3 basis points, or 0.03 percentage point, to 2.65 percent, according to BGCantor Market Data. The price of the 2.625 percent security maturing in August 2020 dropped 7/32, or $2.19 per $1,000 face amount, to 99 26/32. The yield slid on Aug. 25 to 2.4158 percent, the lowest level since January 2009.
The two-year note yield gained 6 basis points to 0.55 percent after touching a record low 0.4542 percent on Aug. 24. It was the biggest weekly gain since the five days ended April 23, when the U.S. prepared to sell a record amount of notes.
The extra yield investors demand to hold 10-year notes over 2-year notes, increased yesterday the most in 14 months on reduced concern the economic recovery is stalling, rising 0.14 percentage point to 2.1 percentage points. The difference dropped on Aug. 26 to 1.96 percentage points, the narrowest since April 2009.
In opening remarks in Jackson Hole, Wyoming, to central bankers from around the world attending the Kansas City Fed’s annual monetary symposium, Bernanke said growth during the past year has been “too slow” and unemployment “too high.”
He also said a handoff from fiscal stimulus and inventory restocking to consumer spending and business investment “appears to be under way” and that the “preconditions” for growth in 2011 are “in place.”
The Federal Open Market Committee “is prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly,” Bernanke said.
“The FOMC is disappointed in the economy, but not panicking,” Ward McCarthy, chief financial economist in New York at the primary dealer Jefferies Group Inc., wrote in a note to clients. “Bernanke did not preclude the possibility of taking on more risk, but it is clearly not a high priority at this point.”
Economic growth slowed less than analysts expected to a 1.6 percent annual pace in April through June, compared with the 2.4 percent rate projected by the government last month, the Commerce Department reported yesterday. The median forecast of 81 economists in a Bloomberg News survey was for a 1.4 percent expansion. The economy grew 3.7 percent in the first quarter.
Consumer spending, which accounts for about 70 percent of the economy, rose at a 2 percent annual rate in the second quarter, compared with a previously reported 1.6 percent pace.
The Fed said in its Aug. 10 statement that U.S. growth would be slower than anticipated and announced it would buy Treasuries to set a $2.05 trillion floor on its balance sheet and keep interest rates from rising.
“The market was overbought, and now we are moving to levels where people feel more comfortable coming back in given the absence of more buying from Bernanke,” said Thomas Tucci, head of U.S. government bond trading in New York at Royal Bank of Canada, a primary dealer. “There was a big expectation in the market of more buying that is gone.”
The 10-year note yield touched a 19-month low this week after reports showed sales of new homes in the U.S. dropped in July to a record and orders for durable goods increased less than economists forecast.
The two-, five- and seven-year notes making up the $102 billion of notes sold this week all sold at record low yields as investors took refuge.
Employers eliminated 100,000 positions in August after a reduction of 131,000 in the previous month, according to the median forecast of 59 economists in a Bloomberg News survey before the Labor Department’s payrolls report on Sept. 3. The unemployment rate probably increased to 9.6 percent this month from 9.5 percent.
In an opinion piece in the Washington Post, Mohamed A. El- Erian, chief executive officer at Pacific Investment Management Co., said unemployment is high, consumer credit is shrinking and small companies are having trouble obtaining lines of credit.
“Data signals have become more alarming,” wrote El-Erian, whose company runs the world’s biggest bond fund. “Current policy approaches here and abroad are unlikely to deliver a durable and robust U.S. recovery.”