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Treasuries Advance on Speculation Fed Will Extend Monetary Easing Policy
Treasuries rose, snapping a two-day decline, amid speculation the Federal Reserve will take more action to keep borrowing costs low even as concern over a double-dip recession recedes.
Benchmark 10-year yields dropped from the highest level in four weeks after James Bullard, president of the Fed Bank of St. Louis, said the central bank will take additional steps to boost the economy should conditions warrant. The Organization for Economic Cooperation and Development said yesterday the worldwide recovery is proving slower than projected and policy makers may need to bolster stimulus programs to support it.
“The global economy is not likely to regain full strength, especially to the extent of necessitating a rate hike in any developed countries,” said Satoshi Okumoto, who helps oversee the equivalent of $65 billion as general manager at Fukoku Mutual Life Insurance Co. in Tokyo. “This perception will help keep bond yields low.”
The yield on the 10-year note fell two basis points to 2.74 percent as of 6:30 a.m. in London, according to BGCantor Market Data. The 2.625 percent security due August 2020 rose 5/32, or $1.56 per $1,000 face amount, to 99. The yield climbed to 2.76 percent yesterday, the highest level since Aug. 10.
Futures on the CME Group exchange show a 74 percent chance the Fed will keep its target rate for overnight bank lending in a range of zero to 0.25 percent by its December meeting, up from a 68 percent probability a month ago.
‘Get Worse’
“We will take more action if things do get worse,” Bullard said yesterday in an interview with CNBC. “As the news comes in, we will be able to make moves to keep us closer to our inflation target, not allow inflation to go into negative territory for any sustained length of time.”
Recent data suggest the economy of the Group of Seven nations may grow at an annualized rate of about 1.5 percent in the second half, below the 1.7 percent previously estimated and the 3 percent rate of the first six months of the year, the Paris-based OECD said in a report.
The International Monetary Fund’s chief economist Olivier Blanchard said high unemployment in the U.S., Europe and elsewhere likely will linger for months and governments that can afford to use fiscal stimulus should use it to spur growth.
“The recovery in the best of cases is not going to be a very strong one over the next six months or a year,” Blanchard said in an interview with Bloomberg Television yesterday. Joblessness will fall “relatively slowly in the U.S., maybe faster in Europe but it’s going to be there for a long time,” he said.
Annual Gain
Treasuries have handed investors a return of 7.4 percent this year, after losing 3.7 percent in 2009, according to indexes compiled by Bank of America Corp’s Merrill Lynch unit.
U.S. debt is still poised for a third weekly loss, the longest losing streak since October 2009, before reports next week that economists said will show U.S. retail sales increased and manufacturing in the New York region expanded.
Sales at retailers rose 0.3 percent in August and the Fed Bank of New York’s general economic index climbed to 9 in September from 7.1 the previous month, according to separate surveys before data scheduled for Sept. 14 and 15.
Treasuries fell the most in week yesterday as a Labor Department report showed initial jobless claims dropped to 451,000 in the week ended Sept. 4 from 478,000 the prior period.
‘Extreme Pessimism’
“The extreme pessimism that engulfed financial markets in August and early September is gradually receding, as economic data still show a sustained recovery,” said Masahide Tanaka, a senior strategist in Tokyo at Mizuho Trust & Banking Co., a unit of Japan’s second-largest bank. “The recent flight to safer assets such as government bonds was overdone.”
The extra yield investors demand to hold 10-year notes over two-year debt widened yesterday on easing concern the global economy is stalling. The spread expanded four basis points to 2.19 percentage points, nearing the 2.24 points reached last week that was the widest since Aug. 11. It was little changed at 2.19 percentage points today.
Yesterday’s sales of 30-year bonds drew a yield of 3.820 percent, compared with the average forecast of 3.806 percent in a Bloomberg News survey of 9 of the 18 primary dealers obligated to participate in U.S. auctions.
The primary dealers bought 55.6 percent of the sale, their largest share of a 30-year auction since October, when they purchased 57 percent.
‘Sloppy Auction’
Indirect bidders, an investor class that includes foreign central banks, purchased 36.1 percent of the bonds yesterday, compared with 46 percent at the Aug. 12 sale and an average of 36.6 percent for the past 10 sales. Direct bidders, non-primary- dealer investors who place their bids directly with the Treasury, bought 8.3 percent, compared with an average of 18 percent for the past 10 sales.
“It was a sloppy auction where primary dealers were left with a large chunk, but there was still good demand, as there has been across the curve,” said Brian Edmonds, head of interest rates in New York at Cantor Fitzgerald LP, a primary dealer.
The auction’s bid-to-cover ratio, which gauges demand by comparing total bids with the amount offered, was 2.73, versus 2.77 at the auction last month and an average of 2.65 for the past 10 offerings.
Yesterday’s auction, a reopening of last month’s sale, was the final of three note and bond offerings this week totaling $67 billion. It was the smallest combination for 3-, 10- and 30- year securities since July 2009.
To contact the reporters on this story: Yasuhiko Seki in Tokyo at yseki5@bloomberg.net
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