Treasury 10-Year Notes Rise for Fourth Day on Bets Fed Will Buy More Debt
Treasury 10-year notes rose for a fourth day in the longest stretch of gains since June as traders speculated that the Federal Reserve is preparing to increase purchases of U.S. debt.
The yield on the two-year note touched a record low for a second day after the Fed said yesterday it’s “prepared to provide additional accommodation if needed to support the economic recovery.” The central bank bought $2.07 billion of Treasuries maturing from March 2013 to April 2014 today as part of its effort to keep borrowing costs low.
“There is an underlying bid in the market as the bull trend in Treasuries remains intact,” said Martin Mitchell, head government bond trader in Baltimore at Stifel Nicolaus & Co., a brokerage firm. “The Fed has tipped their hand that they are likely to initiate a larger-scale asset-purchase program in the future. If the Fed becomes a larger buyer, the Treasury market can only go higher.”
The benchmark 10-year note yield dropped 2 basis points, or 0.02 percentage point, to 2.56 percent at 4:04 p.m. in New York, according to BGCantor Market Data. The price of the 2.625 percent security maturing in August 2020 gained 5/32, or $1.56 per $1,000 face amount, to 100 19/32.
The 10-year note yield touched 2.50 percent, the lowest level since Sept. 1. The last time the yield fell for four days in a row was on June 30. The 2-year yield climbed 1 basis point to 0.43 percent after dropping earlier to a record 0.41 percent. The 30-year bond yield fell 4 basis points to 3.74 percent.
Yield Curve
The extra yield investors demand to hold 10-year notes compared with 2-year securities slid to 2.13 percentage points, the narrowest on a closing basis since Sept. 7, reflecting concern the economic recovery is stalling.
European bonds gained on the Fed’s statement. The yield on the benchmark 10-year German bund dropped as much as 12 basis points to 2.34 percent in the biggest intraday decrease since Aug. 24, when the yield fell as much as 14 basis points.
Gold for December delivery touched an all-time high of $1,298. The dollar dropped to the lowest level since March against the currencies of six major trading partners. The Standard & Poor’s 500 Index fell 0.5 percent.
U.S. home prices dropped 3.3 percent in July from a year earlier in an eighth consecutive decrease as foreclosed properties flooded the market, the Federal Housing Finance Agency in Washington said. Prices fell 0.5 percent from June, compared with a 0.2 percent drop that was the median forecast of 15 economists in a Bloomberg News survey.
‘Gravitate Higher’
“That puts another feather in the cap of the possibility of quantitative easing as it reflects the Fed’s concern about falling prices,” said Thomas Tucci, head of U.S. government bond trading in New York at Royal Bank of Canada, one of the 18 primary dealers that trade directly with the Fed. “The Treasury market should gravitate higher from here.”
The 2-year note yield was 18 basis points above the upper end of the Fed’s target rate for overnight lending between banks. The spread was 17 basis points yesterday, the narrowest since Dec. 15, 2008, a day before the central bank reduced the benchmark to a range of zero to 0.25 percent.
The Fed said in its statement yesterday that it’s prepared “to provide additional accommodation if needed to support economic recovery and to return inflation, over time, to levels consistent with its mandate.”
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 said Sept. 17.
Goldman Sachs View
The central bank will announce at its next meeting that it intends to buy at least $1 trillion of Treasuries, economists at Goldman Sachs Group Inc. led by Jan Hatzius in New York wrote in a report after the central bank’s statement was released. “A sizable asset purchase program will be implemented in coming months,” according to Goldman Sachs, a primary dealer.
The Fed retained its stance from last month of keeping its portfolio of securities stable at about $2 trillion to keep money from draining out of the financial system. It has bought $30.172 billion of Treasuries since Aug. 17.
U.S. government debt due in five to seven years will outperform other sectors of the Treasury curve if the Fed extends its asset purchases, according to David Ader, head of government bond strategy in Stamford, Connecticut, at CRT Capital Group LLC.
Treasuries maturing from five to seven years have returned 1.349 percent since the Fed’s announcement to buy more debt at the Aug. 10 meeting, outperforming the 1.186 percent return for the broader Treasury market, according to Bank of America Merrill Lynch index data.
“The Fed has been active in the belly of the yield curve, so Treasuries there should continue to benefit,” Ader said. “We are being sustained by this revitalized or enhanced notion from the Fed that QE is a very viable option. Now it comes down to big data. Treasuries will stay bid until the data goes the other way.”
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
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