Treasuries Slump as Federal Reserve Begins Second Round of Monetary Easing
Treasuries tumbled, with two-year note yields rising the most in 10 months, as government debt sales received lower-than-average demand even as the Federal Reserve started a second round of monetary stimulus.
Treasury 10-year notes rose 26 basis point for the week, the most since December 2009, ahead of government reports forecast to show U.S. retail sales and consumer prices increased, indicators of faster economic growth. The Fed began buying $105 billion of debt through Dec. 9 to spark the economy and lift inflation expectations, including as much as $34.5 billion next week.
“We rallied very hard into the Fed announcement and now with the supply over and the first purchase completed, the market is giving up some of the gains,” said Eric Lascelles, chief rates strategist and economist at Toronto-Dominion Bank’s TD Securities unit in Toronto. “The Fed purchases are still brand new and will hold the attention to the market, but next week eyes will also be on retail sales and CPI to see if we have any more positive economic momentum.”
The yield on the two-year note increased 14 basis points, or 0.14 percentage point, to 0.50 percent in New York, according to BGCantor Market Data, the most since the week ended Jan. 1. Benchmark 10-year note yields rose 26 basis points to 2.78 percent and 30-year bond yields gained 16 basis points to 4.28 percent.
Debt Sales
The Treasury’s $16 billion auction of 30-year bonds on Nov. 10 drew a bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, of 2.31, the lowest since November 2009.
The day before the Treasury sold $24 billion of 10-year notes at a yield of 2.636 percent, compared with the average forecast of 2.644 percent in a Bloomberg News survey. On Nov. 8 the government sold $32 billion in three-year debt at a yield of 0.575 percent, compared with the 0.577 percent average forecast in a Bloomberg News survey.
The yield difference between Treasury 10-year notes and 30- year bonds hovered near unprecedented levels even as it contracted to 150.7 percentage points, after touching an all- time high of 160.3 percentage points On Nov. 10. The spread has averaged 52.8 percentage points since the start of 2000.
Wide Spread
“The spread has widened out with the Fed buying more in the 10-year sector than the 30-year bond, and inflation expectations increasing,” said Suvrat Prakash, an interest-rate strategist in New York at BNP Paribas SA’s BNP Paribas Securities unit, one of the 18 primary dealers required to bid at Treasury auctions. “Whether it continues to widen is a question on the market’s mind.”
Retail sales in the U.S. climbed 0.7 in October, the fourth consecutive increase, according to the median forecast of 67 economists surveyed by Bloomberg. Consumer prices in the U.S., for goods other than food and energy, rose 0.1 percent in October, according to 65 economists surveyed by Bloomberg.
Treasuries also fell this week as European finance ministers sought to reassure investors who have driven bond yields to records in Ireland and Portugal as leaders at a Group of 20 summit in Seoul addressed the Irish debt crisis amid speculation the EU will need to step in with a bailout.
Ireland Talks
Ireland’s Finance Ministry said it isn’t holding talks on an application for emergency funding from the EU. Reuters reported, citing euro-zone sources it didn’t name, that Ireland is in talks about tapping a European rescue fund and it’s very likely to get aid.
“Ireland is fully funded into the middle of 2011,” the Finance Ministry said in an e-mail yesterday. “There is no application for emergency funding from the European Union.”
The Fed yesterday began a second round of unconventional monetary easing by acquiring $7.23 billion of Treasuries in attempt to drive down borrowing rates to help reduce unemployment and avert deflation.
The acquisitions are part of the Fed’s plan to acquire $600 billion of Treasuries through June and reinvest maturing mortgage holdings. The policy-setting Federal Open Market Committee announced this round of stimulus on Nov. 3.
‘Some Discomfort’
“There is some discomfort in the market right now because the QE2 has come under such criticism by a vast array of sources,” said Ward McCarthy, chief financial economist in New York at primary dealer Jefferies & Co. Inc. “Once the Fed gets into its routine -- next week they will be in buying Treasuries every day -- it will begin to have a positive effect on the Treasury market.”
Bank of America Merrill Lynch’s MOVE index, measuring price swings based on over-the-counter options maturing in 2 to 30 years, climbed yesterday to 91.60, the highest level since Nov. 2, the day before the central bank announced that it will buy $600 billion in additional government debt through June.
“Many expected that volatility would have declined since QE is a prescription for low and stable rates,” James Caron, head of U.S. interest-rate strategy at primary dealer Morgan Stanley in New York, wrote in a research note. “We should get used to the fact that rates may swing around a lot, but ultimately stay in a range, unless fundamental conditions change and warrant a break in that range. Perhaps this is the new world order that QE will usher in.”
To contact the reporter on this story: Cordell Eddings in New York at ceddings@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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