Treasury 30-Year Bond Declines on Bet That Fed Will Buy Shorter Maturities

Treasury 30-year bonds fell on speculation the Federal Reserve will buy shorter-maturity debt if policy makers expand purchases of government securities to sustain the economic recovery.

The two-year Treasury yield matched a record low before an employment report Oct. 8 forecast to show no change in overall payrolls. Fed Chairman Ben S. Bernanke said yesterday the first round of asset purchases, called quantitative easing, improved the economy and more buys would help the economy. The Fed bought $5.19 billion of U.S. notes due from September 2016 to May 2017 today in a program of reinvesting mortgage-holding proceeds.

“The Fed is likely to buy Treasuries concentrated in the intermediate part of the curve,” said Richard Bryant, senior vice president in fixed income at MF Global Inc. in New York, a broker of exchange-traded futures. “In buying back Treasuries, they are unlikely to extend much of their purchases past the 10- year. The market is out in front of the Fed to a decent degree.”

The 30-year bond yield rose 3 basis points, or 0.03 percentage point, to 3.74 percent at 4:28 p.m. in New York, according to BGCantor Market Data. It earlier touched 3.76 percent, the highest level since Sept. 30. The price of the 3.875 percent security due in August 2040 fell 17/32, or $5.31 per $1,000 face amount, to 102 14/32.

The yield on the benchmark 10-year note slipped 1 basis point to 2.47 percent. It touched 2.43 percent, the lowest level since Aug. 25. Two-year notes yielded 0.3987 percent, matching the record low set yesterday.

‘Almost a Certainty’

“Short-term, the market may be a little bit overbought,” said Thomas L. di Galoma, head of U.S. rates trading at Guggenheim Capital Markets LLC, a New-York based brokerage for institutional investors. “QE is almost a certainty at the November meeting” of Fed policy makers.

The yield on the 2-year note may fall to 0.33 percent, Louise Yamada, a technical analyst at New York-based Louise Yamada Technical Research Advisors LLC, said in an interview with Tom Keene on Bloomberg Television. Yamada predicted the 2008 bear market in stocks.

Stocks rallied, with the Standard & Poor’s 500 Index climbing 2.1 percent.

The Labor Department will likely say on Oct. 8 the unemployment rate rose to 9.7 percent in September from 9.6 percent in August, while overall nonfarm hiring stagnated, according to Bloomberg surveys of economists.

Service Industries

The Institute for Supply Management’s index of non- manufacturing businesses, which covers about 90 percent of the economy, rose to 53.2 last month from 51.5 in August, compared with 54.3 in July. The median forecast in a Bloomberg News survey was for a gain to 52.

The extra yield investors demand to hold 10-year securities over 2-year debt widened to 2.08 percentage points, from 2.07 yesterday. The spread touched the narrowest in four weeks, 2.03 percentage points, on Sept. 28.

The U.S. central bank’s purchase of Treasuries today was part of a program to reinvest principal payments on its mortgage holdings into long-term government debt to prevent money from being drained out of the financial system. The Fed is set to acquire Treasuries due from March 2013 to August 2014 tomorrow.

Japan’s decision to buy $60 billion of assets and cut its benchmark interest rate to stimulate growth bolstered optimism the Fed will boost Treasury purchases to strengthen the U.S. recovery. The Bank of Japan lowered the benchmark interest rate to a range of zero percent to 0.1 percent from the previous 0.1 percent target.

‘Additional Accommodation’

The Fed snapped up $300 billion of Treasuries last year, and said in August it would reinvest proceeds from maturing mortgage holdings into government debt. The central bank, which meets next Nov. 2-3, said in a policy statement on Sept. 21 that it’s prepared “to provide additional accommodation if needed to support economic recovery.”

Further asset purchases would help the economy, Bernanke said yesterday.

“The additional purchases -- although we don’t have precise numbers for how big the effects are -- I do think they have the ability to ease financial conditions,” Bernanke said at a forum with college students in Providence, Rhode Island. He said the first wave, which ended in March, was an “effective program.”

The U.S. budget deficit for the 2010 fiscal year ended Sept. 30 is likely to be close to 10 percent of gross domestic product, or almost as large as the previous year’s shortfall, a Treasury official said today.

Mary Miller, assistant secretary for financial markets, said in remarks prepared for a conference in New York that the Fed’s decision to purchase Treasury securities in the secondary market won’t affect debt management.

No Impact

“The Federal Reserve remains a very large investor in our market,” Miller said. “I would like to underscore that their decision to purchase Treasuries in the secondary market does not, and will not, impact our debt-management strategy.”

The gap between yields on 10-year notes and Treasury Inflation Protected Securities, or TIPS, a gauge of trader expectations for consumer prices, rose 7 basis points to 1.88 percentage points. The five-year average is 2.10 percentage points.

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net;

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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