Treasury 10-Year Note in Longest Slide Since 2008 on Fed Purchases Outlook
Oct. 27 (Bloomberg) -- Dan Fuss, vice chairman at Loomis Sayles & Co., talks about Federal Reserve policy and the outlook for bonds. Treasury 10-year notes dropped for a sixth day, the longest streak in two years, as a report showing new-home sales rose more than forecast added to speculation a Federal Reserve program to boost the economy may be gradual. Fuss talks with Carol Massar on Bloomberg Television's "Street Smart." (Source: Bloomberg)
Treasury 10-year notes dropped for a sixth day, the longest streak in two years, as a report showing new-home sales rose more than forecast added to speculation a Federal Reserve program to boost the economy may be gradual.
Thirty-year yields climbed for a second day while two-year yields were little changed amid speculation signs of growth will allow the Fed to buy fewer securities than some traders estimated in a tactic known as quantitative easing. Pacific Investment Management Co.’s Bill Gross said a renewal of asset purchases will likely signify the end of a 30-year bull market in bonds. The U.S. sold $35 billion of five-year notes today.
“The market is consumed with QE,” said John Spinello, chief technical strategist in New York at Jefferies Group Inc., one of 18 primary dealers that trade with the Fed. “There are indications that the marketplace is disappointed at the fact that it’s more than likely not going to be a huge initial undertaking and no one knows the amount.”
The yield on the 10-year note increased eight basis points, or 0.08 percentage point, to 2.72 percent at 4:59 p.m. in New York, according to BGCantor Market Data. It touched 2.73 percent, the highest level since Sept. 20. The yield was up 37 basis points to 3.96 percent after its last six-day string of increases, which ended Oct. 30, 2008. The 2.625 percent security due in August 2020 dropped 21/32, or $6.56 per $1,000 face amount, to 99 5/32.
The 30-year bond yield climbed as much as seven basis points to 4.06 percent, the highest level since Aug. 6, while the two-year note yield added two basis points to 0.41 percent.
Monthly Loss
Treasuries overall have lost 0.4 percent in October, headed for the first monthly decline since March, according to the Bank of America Merrill Lynch Treasury Master index.
The five-year notes sold today drew a yield of 1.33 percent, compared with a forecast of 1.319 percent in a Bloomberg survey of eight primary dealers, which are obligated to bid in U.S. debt sales. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.82. The average at the past 10 auctions was 2.76.
The last five-year note auction, a $35 billion sale Sept. 28, drew a yield of 1.26 percent, which was the lowest on record. Yields on five-years touched a record low of 1.069 percent on Oct. 8.
“Some areas of the curve have been really expensive in anticipation of” Fed purchases, said Thomas Tucci, U.S. government bond trading head at primary dealer Royal Bank of Canada’s RBC Capital Markets unit in New York. “When you come with supply you don’t necessarily have buyers at these outright levels.”
New-Home Sales
Sales of new homes rose 6.6 percent in September to a 307,000 annual rate that exceeded the median forecast in a Bloomberg News survey, Commerce Department data showed today.
Inflation expectations, as measured by the so-called breakeven rate between yields on 10-year Treasury Inflation Protected Securities and comparable conventional notes, increased to the most since May 18 as traders increased bets that quantitative easing will increase consumer prices. The difference widened to as much as 2.2 percentage points.
Estimates for the ultimate size of the asset-purchase program range from $1 trillion at Bank of America-Merrill Lynch Global Research to $2 trillion at Goldman Sachs Group Inc. Economists at both firms agreed the Fed will likely start by announcing $500 billion after its Nov. 2-3 policy meeting.
The central bank is likely to offer a program of Treasury purchases worth a few hundred billion dollars over several months at its next meeting, the Wall Street Journal said today.
$61 Billion a Month
Should the Fed’s plan resemble its $300 billion of Treasury purchases in 2009, focusing on recently issued securities, the central bank will probably buy about $61 billion of government securities per month, said Thomas Roth, senior Treasury trader in New York at Bank of Tokyo-Mitsubishi UFJ Ltd.
Fed policy makers, who already cut interest rates almost to zero and bought $1.7 trillion of securities, are discussing more purchases of Treasuries to flood markets with cheap money to prevent stagnating prices from undermining the recovery. The policy is sometimes called QE2 because it will be Fed Chairman Ben S. Bernanke’s second effort at quantitative easing.
Pimco’s Gross, manager of the world’s largest bond fund, wrote that Fed “check-writing in the trillions is not a bondholder’s friend.”
“It is in fact inflationary, and, if truth be told, somewhat of a Ponzi scheme,” Gross wrote in his monthly investment outlook posted on Newport Beach, California-based Pimco’s website today. “It raises bond prices to create the illusion of high annual returns, but ultimately it reaches a dead end where those prices can no longer go up.”
Cut Holdings
Gross, co-founder of Pimco, reduced holdings of government- related debt in the $252 billion Total Return Fund for the third straight month in September, to 33 percent, after the securities accounted for 63 percent of assets in June.
At today’s auction, indirect bidders, a class of investors that includes foreign central banks, purchased 39.5 percent of the five-year notes, versus a 44.9 percent average for the past 10 sales. Direct bidders, non-primary dealers that place their bids directly with the Treasury, bought 11.7 percent, compared with an average 11.3 percent at the past 10 offerings.
A sale of $35 billion of two-year notes yesterday drew higher-than-average demand amid speculation the Fed’s efforts won’t bring the economy back to full speed quickly. The U.S. will sell $29 billion of seven-year notes tomorrow.
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
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
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