Treasury 30-Year Bonds Tumble as Fed Purchases Other Securities
Nov. 3 (Bloomberg) -- Al Broaddus, former president of the Federal Reserve Bank of Richmond, Diane Swonk, chief economist at Mesirow Financial Inc., and John Richards, head of strategy for the Americas at RBS Securities Inc., talk about the Federal Reserve's plan to buy an additional $600 billion of Treasuries through June in a bid to reduce unemployment and avert deflation. The central bank kept its pledge to keep interest rates low for an “extended period.” They talk with Mark Crumpton on Bloomberg Television’s “Bottom Line.” (This report is an excerpt from the full interview. Source: Bloomberg)
Treasury 30-year bonds fell the most in two months after the Federal Reserve said it will buy fewer of the securities than anticipated by investors in its $600 billion program of purchases to boost the economy.
The difference between rates on 30-year bonds and Treasury Inflation Protected Securities touched the widest since May 2008 on concern the Fed will be successful in reigniting inflation. The Fed said in a statement at the end of a 2-day Federal Open Market Committee gathering that it will make 4 percent of its purchases in the 17- to 30-year sector. In its first round of purchases, ended in March, the Fed bought $1.7 trillion in securities, including $300 billion in Treasuries, in an effort to spur economic growth strong enough to lower unemployment from near a 26-year high.
“The yield curve should start to steepen because the Fed will focus on 5- to 6- years,” said William Larkin, a fixed income portfolio manager in Salem, Massachusetts, at Cabot Money Management, which manages $500 million. “The risk once they finish is that inflation will be elevated. There’s a good chance we’ll be rip-roaring in terms of growth and inflation.”
Thirty-year bond yields rose 11 basis points to yield 4.04 percent at 5:07 p.m. in New York, after earlier reaching the biggest rise since Sept. 9. The 3.875 percent bonds due in August 2040 rose 1 30/32, or $19.38 per $1,000, to 97 4/32.
Near Record
The yield on the 10-year note fell 2 basis point to 2.57 percent after touching 2.63 percent. The two-year note yield fell 2 basis points to 0.33 percent, near the record low 0.3270 percent on Oct. 12.
The difference between rates on 30-year bonds and Treasury Inflation Protected Securities touched 2.74 percent, the highest since May 2008 when the financial crisis was intensifying. The figure is a gauge of trader expectations for the annual increase in consumer prices during the life of the securities, known as the break-even rate.
The difference between yields on 30-year bonds and 10-year notes climbed to 1.498 percentage points, the highest ever.
The Fed said it will focus the majority of its purchases on the intermediate part of the yield curve, and will make 23 percent of its purchases in the 5 1/2- to 7-year sector and an equal amount in the 7- to 10-year sector. It plans to make about 86 percent of its purchases in securities maturing between 2.5 years and 10 years, the statement said.
Buy Zones
“The long end is almost assuredly getting hit because the announced purchases at the longer end are much smaller than everywhere else,” said Dan Greenhaus, chief economic strategist at Miller Tabak & Co. in New York.
The Fed said it is temporarily relaxing a 35 percent per- issue limit on asset holdings as part of the central bank’s plan to expand its balance sheet to spur growth, according to a statement. The central bank will allow individual security holdings to top the 35 percent level “only in modest increments,” the New York Fed said.
The Fed left the target rate for overnight loans between banks at a record low range of zero to 0.25 percent, where it has been since December 2008. Policy makers, who said new purchases will be about $75 billion a month, “will adjust the program as needed to best foster maximum employment and price stability,” the Fed’s Open Market Committee said in a statement in Washington. The central bank retained its pledge to keep interest rates low for an “extended period.”
Bernanke’s Moment
This expanded quantitative easing marks the signature action to date of Fed Chairman Ben S. Bernanke, defining him as was the case with predecessors Paul Volcker, known for deploying record-high interest rates to wring inflation from the economy, and Alan Greenspan, who described “irrational exuberance” to help pop a bubble in equities markets in response to his monetary policy.
“Bernanke will be viewed admirably as a Fed chairman who took over under difficult circumstances and wasn’t afraid to use unconventional means to stem a crisis,” said Jeffrey Caughron, associate partner in Oklahoma City at the Baker Group LP, which advises community banks on investing assets totaling $23 billion. “There’s no question the economic conditions are the most serious since the Great Depression.”
Estimates for the size of additional asset purchases ranged from $1 trillion at Bank of America-Merrill Lynch Global Research to $2 trillion at Goldman Sachs Group Inc.
‘They Got it Wrong’
“The fact that they are looking to do another QE program suggests the first one wasn’t enough,” said Guy LeBas, chief fixed-income strategist and economist at Janney Montgomery Scott LLC in Philadelphia, before the announcement. “They got it wrong the last couple of times.”
Treasury said it plans to $72 billion in its quarterly sales of long-term debt next week, as lower projected budget deficits have allowed the government to reduce borrowing.
It will auction $32 billion in three-year notes on Nov. 8, $24 billion in 10-year notes Nov. 9 and $16 bilion in 30-year bonds Nov. 10. The total amount was in line with the median forecast in a Bloomberg News survey of bond dealers and signals a pause in the Treasury’s auction cutbacks until the fiscal and economic outlook becomes clearer.
Bernanke told central bankers gathered in Jackson Hole, Wyoming, on Aug. 27 that “preconditions for a pickup in growth in 2011” appear to be in place. Even so, he said policy makers are “prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly.”
Prepared to Act
Fed policy makers said in a statement on Sept. 21 they were prepared to act to support the recovery and increase the inflation rate, raising speculation they would increase their government bond purchases.
Consumer prices excluding food and fuel costs rose 0.8 percent in September from the year before, the smallest year- over-year gain since 1961, figures from the Labor department showed Oct. 15.
PCE core, the Fed’s preferred annual measure of inflation, was unchanged from the prior month and was up 1.2 percent last month from a year earlier, the smallest gain since September 2001, government figures showed Nov. 1. The figure tracks the personal consumption expenditures price index excluding food and energy.
The difference between rates on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for the annual increase in consumer prices over the life of the securities, known as the break-even rate, widened 34 basis points in October to 2.15 percentage points, showing Fed’s attempts to increase inflation expectations are working.
Inflation Protection
“The Fed is looking to protect, six to 12 months from now, core inflation from going negative,” said LeBas at Janney Montgomery Scott. “The fact that break-evens are rising suggests the market believes the Fed will be successful in preventing deflation.”
A $10 billion sale of five-year TIPS on Oct. 25 drew a yield of minus 0.55 percent, the first negative rate at a U.S. note or bond sale, as investors speculated they will have positive returns when inflation picks up.
Gross domestic product rose at a 2 percent annual rate from July through September, in line with economists’ forecasts, Commerce Department figures showed Oct. 29. The pace was 1.7 percent in the second quarter and 3.7 percent in the first.
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.
Mark MacQueen, a partner and portfolio manager at Austin, Texas-based Sage Advisory Services, which oversees $9.5 billion, said the steps by the Fed may lower interest rates, while proving ineffective in nudging the economy.
“We will continue to see low growth and high unemployment even after QE2,” MacQueen said. “Unemployment will stay stubbornly high and inflation will increase over the long run. The dollar will decline.”
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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