Treasury 10-Year Yields Rise From Record Low on Obama Plan, Equity Rally

Treasury 10-year note yields rose from an all-time low on speculation President Barack Obama’s plan to spark hiring by injecting more than $300 billion into the economy may bolster growth.

The benchmark debt fell for the first time in four days as a rally in stocks reduced demand for the safety of U.S. government debt. The extra yield investors get to hold 30-year bonds instead of two-year notes fell yesterday to the smallest in more than a year on bets Federal Reserve Chairman Ben S. Bernanke may signal purchases of longer-duration debt while shedding shorter maturities.

“Today is a risk-on day, with stocks rallying, but there is still uncertainty out there with respect to domestic policy, growth and especially the euro zone,” said Christian Cooper, head of U.S. dollar derivatives trading in New York at Jefferies Group Inc., one of the 20 primary dealers that trade with the Fed.

Yields on 10-year notes increased six basis points, or 0.06 percentage point, to 2.04 percent at 5:25 p.m. in New York, according to Bloomberg Bond Trader prices. The 2.125 percent securities maturing in August 2021 fell 17/32, or $5.31 per $1,000 face amount, to 100 22/32. The yields slid yesterday to 1.9066 percent, the lowest on record.

U.S. debt also dropped today as three constitutional challenges to Germany’s participation in euro rescue funds were rejected by the nation’s top court and Italian Prime Minister Silvio Berlusconi obtained a majority in a Senate confidence vote on his 54 billion euro ($76 billion) austerity plan.

Gain in Stocks

The Standard & Poor’s 500 Index rose 2.9 percent. The Stoxx Europe 600 Index added 3.1 percent, while the MSCI Asia Pacific Index advanced 2.2 percent.

Yields on two-year notes were little changed at 0.20 percent. A drop of almost two points for the 30-year bond pushed yields up nine basis points to 3.36 percent.

The yield spread between two- and 30-year Treasuries was 316 basis points after falling yesterday to 308 basis points, the narrowest on a closing basis since August of last year.

President Obama is preparing to explain his plans in an address to Congress tomorrow as unemployment remains at 9.1 percent more than two years after the recession’s official end. He may call on lawmakers to offset the cost of short-term jobs measures by raising tax revenue later.

Chicago Fed President Charles Evans called in a London speech for more stimulus, including a commitment to keep interest rates low until unemployment falls to around 7.5 percent while holding medium-term inflation below 3 percent.

Beige Book

The Fed said in its Beige Book survey released today in Washington that the economy grew at a slower pace in some regions of the country as shoppers limited their spending and factories curbed production.

“The Beige Book underscores that with growth and inflation pressure low, the Fed can be very creative in its next policy response,” Cooper of Jefferies said.

The Fed may buy $520 billion of longer-maturity Treasuries while selling shorter-term U.S. debt, pushing the 10-year yield to as low as 1.60 percent, according to CRT Capital Group LLC.

The central bank’s $1.64 trillion of holdings of Treasuries include $520 billion of debt maturing in 2014 or sooner, which could be sold and reinvested in securities due from 2018 to 2039 to raise the duration of the central bank’s government debt portfolio to 7.4 years, CRT strategists including David Ader in Stamford, Connecticut, wrote yesterday in a note to clients.

Fed Debt Buying

The Fed has purchased $2.3 trillion of debt since 2008 in two previous rounds of what is known as quantitative easing, or QE, to drive rates lower and help spur growth.

Bernanke will speak on the U.S. economic outlook tomorrow in Minneapolis. Fed officials gather for a two-day meeting on Sept. 20 that was expanded from the one day originally scheduled to “allow a fuller discussion” of the economy and the central bank’s possible policy response.

“Fundamentally, there isn’t a lot of value in Treasuries, but the reality is that it doesn’t really matter right now,” said Larry Milstein, managing director of government and agency debt trading in New York at R.W. Pressprich & Co., a fixed- income broker and dealer for institutional investors. “There is so much uncertainty in regards to growth, Europe, Fed action and what may come from policy makers that this is a buy-the-dip environment.”

Treasuries have returned 8.2 percent in 2011 in what would be their best year since the depths of the financial crisis in 2008, according to Bank of America Merrill Lynch indexes.

The Fed risks causing a decline in longer-term lending by holding down benchmark rates, Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., wrote in an opinion article on the Financial Times website. The Fed pledged on Aug. 9 to keep its target rate for overnight lending between banks at virtually zero until at least mid-2013.

If the central bank seeks to drive down longer-maturity yields, as some are anticipating, then it may “destroy leverage and credit creation in the process,” Gross wrote in an article titled “‘Helicopter Ben’ Risks Destroying Credit Creation.”

To contact the reporters 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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Sept. 7 (Bloomberg) -- Ashish Shah, co-head of global credit investments at AllianceBernstein LP, talks about the fixed-income market and investment strategy. Shah, speaking with Deirdre Bolton and Erik Schatzker on Bloomberg Television's "InsideTrack," also discusses Europe's debt turmoil and global financial markets. (Source: Bloomberg)