Treasury Notes Gain on Speculation Fed to Be More Accommodative This Week
Treasury 10-year notes rose for the first time in four weeks as traders speculated the Federal Reserve will be more accommodative in its policy statement next week as the economic recovery showed signs of stalling.
A rally in two-year notes pushed yields down this week the most since May after the central bank bought shorter-maturity government debt and as investors bet that Japan’s purchases of securities will favor the front end of the U.S. yield curve after it sold the yen to weaken its currency. Notes climbed before the Sept. 21 Fed meeting as the annual rate of inflation excluding food and energy stayed at a 44-year low.
“The economy is still vulnerable,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors. “All we see are numbers that maybe don’t show collapse, but certainly show weakness.”
The 10-year note yield fell 5 basis points, or 0.05 percentage point, to 2.74 percent this week, according to BGCantor Market Data. The price of the 2.625 percent security maturing in August 2020 rose 14/32, or $4.38 per $1,000 face amount, to 98 31/32.
The two-year note yield decreased 10 basis points to 0.46 percent in the biggest weekly drop since May 7, when the yield slid 15 basis points. The 30-year bond yield gained for a fourth week, rising 4 basis points.
Ten-year notes rose on Aug. 10, when the Fed said after its policy meeting that it would keep its bond holdings level by resuming the purchase of U.S. debt to support a recovery it described as “more modest” than earlier anticipated. The central bank reiterated a commitment to keep its benchmark interest rate close to zero for an “extended period.”
Fed Debt Buying
The Fed has purchased $22.9 billion of Treasuries since Aug. 17 to keep holdings in the System Open Market Account at about $2 trillion by using the proceeds of principal payments from its agency mortgage-backed securities and agency debt.
Two-year note yields were within a basis point of the record low of 0.45 percent reached on Aug. 24 after the central bank bought $1.379 billion of securities maturing from December 2012 to February 2013 this week.
U.S. notes gained yesterday as the sovereign-debt crisis showed signs of deepening in Ireland and a report showed that U.S. consumer confidence unexpectedly fell to a one-year low.
John Gormley, leader of Ireland’s Green Party and a member of the ruling coalition, said in an interview with Dublin’s RTE Radio that the country’s bond spreads would widen if Ireland considered renegotiating with bondholders of nationalized Anglo Irish Bank Corp., as suggested by the opposition.
Anglo Irish Aid
Ireland has already pumped 22.9 billion euros ($30 billion) into Anglo Irish, which was nationalized in January 2009.
The extra yield investors demand to hold 10-year Irish debt compared with benchmark German bunds and the cost of protecting Irish government debt from default increased to a record.
“The market is still very sensitive to anything that is reflective of increases in systemic risk,” said Christian Cooper, senior rates trader in New York at Jefferies Group Inc., one of the 18 primary dealers that trade directly with the Fed.
Treasury notes remained higher yesterday after the Thomson Reuters/University of Michigan preliminary index of consumer sentiment unexpectedly dropped to 66.6 in September from 68.9 in the previous month. The median forecast of 65 economists in a Bloomberg News survey was for an increase to 70.
Consumer prices excluding food and energy increased for a fifth straight month at an annual rate of 0.9 percent, matching the slowest year-over-year pace of gains since 1966, the Labor Department reported.
Bank of Japan
Two-year notes outperformed longer maturities this week as traders speculated that the Bank of Japan will use dollars acquired in its yen sales to buy the safest Treasuries. Japan intervened to weaken the yen on Sept. 15 for the first time since 2004 as the currency’s surge to a 15-year high versus the dollar imperiled the Asian nation’s export-led recovery.
Japan, the second largest foreign holder of Treasuries, increased its position 2.2 percent to $821 billion, the most it has owned, the government’s report for July showed.
China, the largest foreign investor in U.S. government debt, boosted its holdings of Treasury notes and bonds after reducing them in June for the first time in 15 months. Total holdings rose 0.4 percent to $846.7 billion, the first increase since April.
China has reduced its holdings of U.S. government securities by 10 percent since reaching a peak at $939.9 billion in July 2009.
“Some might find it strange that foreign demand for dollar-denominated assets is as strong as it is with yields as paltry as they are,” Kevin Giddis, head of fixed-income sales, trading and research at the brokerage firm Morgan Keegan Inc. in Memphis, Tennessee, wrote in a research note to clients this week. “As it stands, there simply isn’t anywhere else to go.”
To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; Susanne Walker in New York at swalker33@bloomberg.net
More News:
- Economy ·
- U.S. ·
- Bonds ·
- Municipal Bonds
Rate this Page