Related News:
Treasury Two-Year Yield Drops to Record Before Federal Reserve Statement
Treasuries gained, pushing yields on two-year notes to a record low, on speculation the Federal Open Market Committee may indicate today that it’s open to increasing purchases of U.S. debt if economic growth slows.
Benchmark 10-year notes advanced for a third day in the longest winning streak since July. The extra yield investors demand to hold the notes compared with 2-year securities dropped to the lowest level in a week as policy makers met.
“The market has had a relentless bid heading into the FOMC announcement,” said Christian Cooper, senior rates trader in New York at Jefferies Group Inc., one of the 18 primary dealers that trade with the Federal Reserve. “Some investors are looking for the Fed to extend quantitative easing. The market might be setting itself up for disappointment.”
The yield on the 10-year note decreased 4 basis points, or 0.04 percentage point, to 2.67 percent at 12:24 p.m. in New York, according to BGCantor Market Data. The price of the 2.625 percent security maturing in August 2020 rose 11/32, or $3.44 per $1,000 face amount, to 99 21/32.
The two-year note yield fell 1 basis point to 0.46 percent after touching the all-time low of 0.4479 percent. The 10-year note yield dropped to a 19-month low of 2.42 percent on Aug. 25. The last time the 10-year note yield slid for three days in a row was on July 30.
The difference between 10- and 2-year note yields fell to 2.22 percentage points, the narrowest since Sept. 14, reflecting concern the U.S. economic recovery is stalling.
Bernanke’s View
The central bank “is prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly,” Fed Chairman Ben S. Bernanke said Aug. 27 at a conference in Jackson Hole, Wyoming.
A survey of money managers overseeing $1.34 trillion by Jersey, City, New Jersey-based Ried Thunberg ICAP, a unit of the world’s largest interdealer broker, found that 57 percent don’t expect the Fed to announce additional asset purchases, while 43 percent expect policy makers to say they’re resuming quantitative easing.
The central bank will hold off from expanding its balance sheet by purchasing securities, according to 60 of 64 analysts in a Bloomberg News survey from Sept. 16 to 17.
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 Fed has bought $28.102 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.
Slowing Growth
Economic growth slowed to a 1.6 percent annual pace in the second quarter, from 3.7 percent from January through March, the Commerce Department said Aug. 27.
Private payrolls rose last month by 67,000, more than economists forecast, after a revised gain of 107,000 in July, the Labor Department reported Sept. 3. The unemployment rate increased to 9.6 percent from 9.5 percent.
“There is little momentum in the economy at this point,” Michael Cloherty, head of U.S. rates strategy for fixed income and currencies at the primary dealer Royal Bank of Canada in New York, wrote in a note to clients. “But unless Bernanke gave us a half-baked view in Jackson Hole, it’s not about the unemployment rate or growth in general. It’s about inflation. Specifically, if deflation risks rise meaningfully, that would set another round of QE in motion.”
Inflation Rate
Consumer prices excluding food and energy increased in August for a fifth month at an annual rate of 0.9 percent, matching the slowest year-over-year rate of gains since 1966, the Labor Department reported Sept. 17.
The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the maturity known as the break-even rate, has climbed to 1.79 percentage points from this year’s low of 1.47 percentage points reached in August. It’s still less than the five-year average of 2.11 percentage points.
BNP Paribas SA and Deutsche Bank AG, both primary dealers, predict 10-year note yields will fall to what would be a record 2 percent by Dec. 31. An investor who buys today would earn 6.7 percent if the forecasts are correct, according to data compiled by Bloomberg. The yield touched the record low of 2.0352 percent in December 2008.
“A change in the wording of the Fed statement, such as revising down growth, will prepare the ground for more concrete action,” said Cyril Beuzit, head of interest-rate strategy at BNP in London. “That would support the market. We favor the scenario for lower yields.”
To contact the reporter on this story: Cordell Eddings in New York at ceddings@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
Rate These Stories
Rate this Page