Treasuries Rise, Led by 30-Year, Before Federal Reserve Decision on Easing

Treasuries rose, led by 30-year bonds, amid forecasts the Federal Reserve will expand asset purchases to drive borrowing costs lower after tomorrow’s two- day policy meeting.

Ten-year note yields declined for the third time in four days as economists surveyed by Bloomberg said the U.S. central bank will announce plans to buy at least $500 billion of long- term securities. Polls show Republicans may retake the U.S. House and narrow Democrats’ margin in the Senate in elections today, reducing the likelihood of additional fiscal spending and limiting government borrowing.

“The Fed will do whatever they have to do to cap rates, especially on the long end, so investors want to extend out the yield curve,” said Larry Milstein, managing director in New York of government and agency debt trading at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors. “Thirty-year notes hitting four percent has made the sector more valuable on a relative basis, sparking buying.”

Ten-year note yields fell four basis points, or 0.04 percentage point, to 2.59 percent at 5:05 p.m. in New York, according to BGCantor Market Data. The 2.625 percent notes due in August 2020 rose 10/32, or $3.13 per $1,000, to 100 10/32. The notes touched a one-month high of 2.73 percent on Oct. 27.

Thirty-year bond yields fell eight basis points to 3.93 percent. Treasury two-year yields were near a record low, yielding 0.35 percent.

Fed Approach

Fed policy makers said after their last meeting on Sept. 21 they were prepared to act to support the recovery and increase the inflation rate, raising speculation they will add to their government bond purchases. That helped send the two-year note yield to an all-time low 0.327 percent on Oct. 12.

U.S. policy makers will restart a program of securities purchases known as quantitative easing to spur growth, reduce unemployment and increase inflation, said 53 of 56 economists surveyed last week.

Twenty-nine estimated the Fed will pledge to buy $500 billion or more, while seven predicted $50 billion to $100 billion in monthly purchases without a specified total. The remainder said the Fed would buy as much as $500 billion or didn’t quantify their forecast.

“The tricky alchemy of trying to fashion a market outlook will be much easier once all of the wash is complete and the clothes are out on the line,” said William O’Donnell, U.S. government bond strategist at Royal Bank of Scotland Plc’s RBS Securities unit in Stamford, Connecticut, one of 18 primary dealers that trade with the Fed. “The current trading range for 10’s is seen at 2.38 percent to 2.85 percent.”

Options Play

Derivatives traders were snapping up options that insure against a rally in Treasury 30-year bonds should the Fed announce another round asset-purchase program that includes more longer-term debt.

“If there is a risk going into the Wednesday afternoon FOMC statement, it would be that the Fed’s QE2 program targets yields a little bit further out the curve, perhaps in the 17- to 20-year sector,” said John Brady, senior vice president in the interest-rates product group at MF Global Holdings Ltd. In Chicago.

The Rothenberg Political Report and Cook Political Report both predict the Republicans will gain at least 50 House seats, more than the 39 they need to take control. Both reports see Democrats losing six to eight seats in the Senate, just shy of the 10 needed for a Republican majority.

Political Fallout

“The stalemates would lead to more cautious spending, smaller deficits and possibly a policy mix skewed toward more Treasury buying from the Fed,” a team of Societe Generale SA analysts led by Vincent Chaigneau in London said in a report today. “Investors have seen the polls, so presumably are positioned for a Republican victory.”

In its quarterly refunding, the Treasury will auction $31 billion of three-year notes, $24 billion of 10-year notes and $16 billion of 30-year bonds, according to the median forecast of a Bloomberg News survey of 12 primary dealers. In August, the Treasury sold $34 billion of three-year debt, $24 billion of 10- year notes and $16 billion of 30-year bonds.

Expectations the Fed will succeed in sparking inflation pushed the difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of expectations for inflation known as the break-even rate, to 2.209 percentage points today, the most since May.

QE Debate

The efficacy of more quantitative easing is still being debated.

“Fed Chairman Ben S. Bernanke has made clear he will do everything he can to make sure the U.S. economy doesn’t pull a Japan,” wrote Joseph Balestrino, fixed-income strategist at Federated Investors Inc. in Pittsburgh, which oversees about $336 billion in assets. “That means a reduced likelihood of a double dip, nothing more. We’re just not convinced that however much the Fed pushes, it can change the slow-growth rut we’re stuck in.”

Treasuries are in “a real dangerous area,” said Donald Yacktman, co-chief investment officer at Yacktman Asset Management Co., whose $2.3 billion Yacktman Fund has outperformed 97 percent of funds with similar objectives during the past five years, in an interview with Margaret Brennan on Bloomberg Television’s “InBusiness” program. “The Fed’s policies have more impact in the short term. I think in the longer term the fiscal policy will have impacts in regards to growth rates”

U.S. employers added 60,000 positions in October, after a loss of 95,000 in September, according to a Bloomberg survey of economists before the Labor Department’s Nov. 5 report. The unemployment rate is forecast to be 9.6 percent for the third straight month, which would make it the 15th month of joblessness at 9.5 percent or higher, the longest stretch since records began in 1948.

To contact the reporter on this story: Cordell Endings 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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