Treasuries rose, pushing 10-year note yields toward a record low, as Federal Reserve Chairman Ben S. Bernanke said policy makers will discuss at their meeting this month the tools they may need to use to boost the recovery and stand ready to employ them if necessary.
The extra yield investors get to hold 30-year bonds instead of two-year notes was almost the smallest in a year on bets the Fed may replace some of the central bank’s shorter-maturity U.S. securities with longer-term debt to lower borrowing rates. European Central Bank President Jean-Claude Trichet supported demand for a refuge when he said “downside risks” to the euro area’s economy have intensified while President Barack Obama prepared to explain his job-creation plan to Congress.
“The focus is squarely on the Fed and the prospects for them to remain involved in Treasuries,” said Richard Bryant, senior vice president in fixed income in New York at MF Global Inc., one of the 20 primary dealers that trade directly with the Fed. “The way is being paved in what will amount in some way, shape or form to further asset purchases. Treasuries remain well-supported.”
Yields on 10-year notes fell six basis points, or 0.06 percentage point, to 1.98 percent at 5:24 p.m. in New York, according to Bloomberg Bond Trader prices. The 2.125 percent securities due in August 2021 rose 18/32, or $5.63 per $1,000 face amount, to 101 10/32. The yield slid on Sept. 6 to 1.9066 percent, the lowest on record.
The 30-year bond yields decreased six basis points to 3.31 percent. Two-year yields were little changed at 0.19 percent. The spread between two- and 30-year yields was 312 basis points after falling on Sept. 6 to 308 basis points, the narrowest on a closing basis since August 2010.
The Standard & Poor’s 500 Index dropped 1.1 percent after earlier rising 0.5 percent. Crude oil for October delivery decreased 0.6 percent to $88.65 a barrel.
Fed policy makers are prepared to use the tools they have “as appropriate to promote a stronger economic recovery in the context of price stability,” Bernanke said in the text of a speech to economists today in Minneapolis. He said in previous remarks the options include lengthening the average duration of securities in its $1.65 trillion Treasury portfolio and buying more government bonds.
The speech is the first time Bernanke has commented about the economy since a Labor Department report showed last week that hiring stalled in August and the unemployment remained at 9.1 percent.
“We’ve got a labor market that’s going nowhere,” said Steven Ricchiuto, chief economist in New York at Mizuho Securities USA Inc., a primary dealer. “The pressure could pull us to lower yields.” The 10-year yield may drop as low as 1.5 percent, he said.
The number of U.S. applications for unemployment insurance payments unexpectedly rose to 414,000 last week from 412,000 in the prior period, the Labor Department reported today.
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.
The yield on Germany’s 10-year bunds fell to a record low 1.823 percent as Trichet said at a Frankfurt press conference that the European economy faces “particularly high uncertainty and intensified downside risks.” The ECB held its target lending rate at 1.50 percent, as forecast by all 57 economists in a Bloomberg News survey.
“It will be difficult to see a back-up in yields, based on the long-term structural uncertainty in Europe as well as domestic fiscal and monetary policy,” said Christian Cooper, head of U.S. dollar-derivatives trading in New York at Jefferies Group Inc., a primary dealer. “The 10-year will be almost bullet-proof. There will be significant buyers on dips.”
Treasuries fell yesterday as some traders bet President Obama’s proposal to inject more than $300 billion into the economy will spur growth.
The plan will likely entail tax cuts, infrastructure spending and direct aid to state and local governments. He may call on lawmakers to offset the cost of short-term jobs measures by raising tax revenue later.
The difference between yields on 10-year Treasuries and similar-maturity inflation-linked debt, a gauge of expectations for inflation known as the break-even rate, was 2.02 percentage points today after shrinking on Sept. 6 to 1.94 percentage points, the narrowest since October 2010.
The government will sell $66 billion in three-, 10- and 30- year debt next week, the Treasury Department reported, matching the forecasts of 10 primary dealers in a Bloomberg News survey. The U.S. will offer $32 billion of three-year notes, $21 billion of 10-year debt and $13 billion of 30-year bonds in three daily auctions beginning Sept. 12.
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