Treasury Bonds Advance as Beige Book Fails to Quell Speculation on Easing
Oct. 18 (Bloomberg) -- Michael Pond, an interest-rate strategist at Barclays Plc, and Anthony Crescenzi, a strategist at Pacific Investment Management Co., talk about the outlook for the U.S. labor market. Pond and Crescenzi also discuss U.S. inflation, Federal Reserve monetary policy and the Treasury market. They talk with Tom Keene on Bloomberg Television's "Surveillance Midday." (Source: Bloomberg)
Treasury 30-year bonds rose as a Federal Reserve regional survey showing a “modest pace” in the economic recovery failed to quell speculation that policy makers will increase asset purchases to spur inflation and employment.
Yields on the longest-maturity U.S. securities touched the lowest level since Oct. 14, reversing an earlier rise, as the dollar slid against most major currencies on bets the central bank will pump more money into the economy in a tactic called quantitative easing. Ninety percent of respondents to a Citigroup Inc. survey said they expected an easing announcement at the Fed’s Nov. 2-3 meeting.
“The Beige Book was more upbeat, but the economy is still weak and there were no clues as to what asset purchases will look like,” said James Combias, New York-based head of Treasury trading at Mizuho Financial Group Inc., one of 18 primary dealers that trade with the Fed. “The market will have to wait to get more answers regarding QE. Until then, the market will stay bid and in a range.”
The yield on the so-called long bond fell two basis points, or 0.02 percentage point, to 3.89 percent at 4:56 p.m. in New York, according to BGCantor Market Data. It slid as low as 3.87 percent. The 3.875 percent security due in August 2040 gained 13/32, or $4 per $1,000 face amount, to 99 22/32. The benchmark 10-year note yield was little changed at 2.48 percent after declining to 2.45 percent and earlier rising to 2.59 percent.
‘Held Steady’
Eight Fed banks, including San Francisco and Chicago, reported some form of growth, according to the survey by the 12 regional banks, which is released two weeks before a meeting of central bank policy makers. The Philadelphia and Richmond Fed banks said their economies were “mixed,” while the Cleveland region “held steady” and the Atlanta district “remained slow” with falling retail sales.
“It’s hard to get excited about comments about the economy with continued weakness in the economy and continued lack of inflation,” said Thomas Simons, a government debt economist in New York at primary dealer Jefferies Group Inc. “Market participants are of the mind that the Fed is still going to buy some amount of Treasuries, and no one is in the position to fight the Fed if they don’t agree with them, and that’s keeping the market bid.”
Fed Chairman Ben S. Bernanke said Oct. 15 there’s a case for additional stimulus because inflation is too low and unemployment too high. The jobless rate was 9.6 percent last month. Inflation, measured by central bankers’ preferred gauge of the personal consumption expenditures price index, minus food and energy, rose 1.4 percent for the 12 months ended in August. The Fed’s preferred inflation range is 1.7 to 2 percent.
Inflation Expectations
The difference between yields on 10-year notes and comparable TIPS, a gauge of trader expectations for consumer prices, widened to 2.06 percentage points today from this year’s low of 1.47 percentage points in August. The five-year average is 2.10 percentage points.
Policy makers completed purchases of about $1.7 trillion of debt in March to support the recovery, including $300 billion in Treasuries in 2009. While a second round of quantitative easing is considered likely by many investors, there has been little indication from policy makers as to how much they will buy.
“The Beige Book was particularly beige this month, with no great surprises one way or the other,” David Ader, head of government bond strategy at Stamford, Connecticut-based CRT Capital Group LLC, wrote in a note to clients. “In and of itself, we’d not say this nails the coffin of QE, but does nothing to detract from it, either.”
Stocks rose, with the Standard & Poor’s 500 Index climbing 1.1 percent. The greenback fell against 15 of its 16 most-traded counterparts, dropping to a 15-year low of 80.85 yen.
Treasuries Beat Stocks
Treasuries have returned 9 percent this year, according to a Bank of America Merrill Lynch index, exceeding the 5.7 percent gain in the S&P 500.
The extra yield investors demand to hold U.S. 10-year notes over benchmark German bunds narrowed to 1.45 basis points, the least since November 2009. It was 89.6 basis points in April, the most in four years.
The Treasury will sell $97 billion in two-, five- and seven-year notes next week, the smallest monthly offering of the securities since February 2009, according to the average forecast in a Bloomberg News survey of 10 of the Fed’s primary dealers, which are required to bid at the auctions.
The U.S. will auction $35 billion in two-year notes, $34 billion in five-year notes and $28 billion in seven-year securities, according to the survey. It will also sell $9 billion in five-year Treasury Inflation Protected Securities, dealers forecast. Sale sizes will be announced tomorrow.
Near Record
The difference between Treasury 5- and 30-year yields was 2.8 percentage points, near the record of 2.83 percentage points set on Oct. 18. The spread has been widening on speculation the Fed will concentrate its purchases on medium-term notes and the stimulus will ultimately result in quicker inflation.
The Fed bought $660 million of Treasury Inflation Protected Securities due from July 2013 to April 2032, according to a statement from the New York Fed, as part of a program to reinvest principal payments on its mortgage holdings. The central bank has purchased $55.7 billion of U.S. securities since it began the program on Aug. 17.
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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