U.S. 5-Year Notes Gain as Fed Cites Economic Risks, Considers Mortgages

Treasury five-year notes rose for a fourth day after Federal Reserve officials refrained from taking any additional steps to ease monetary policy while saying “significant downside risks” remain.

Fed Chairman Ben S. Bernanke said additional purchases of mortgage-backed securities are a “viable option” if the state of the economy requires additional stimulus. Longer-maturity debt led losses earlier as European leaders prepared to hold talks in France to tell Greece there is no alternative to the budget cuts imposed in its bailout plan. Treasury announced it will sell $72 billion in three-, 10- and 30-year debt next week.

“The focus wasn’t necessarily on the risk-on, risk-off,” said Kevin Flanagan, a Purchase, New York-based chief fixed- income strategist for Morgan Stanley Smith Barney. “It was more on the prospect of the Fed lowering their economic projections.”

The yield on the five-year fell two basis points, or 0.02 percentage point to 0.88 at 4:59 p.m. in New York, according to Bloomberg Bond Trader prices. The 1 percent securities maturing in October 2016 rose 1/8, or $1.25 per $1,000 face amount, to 100 19/32.

The yield on the 30-year bond gained as much as 10 basis points before trading one basis point higher at 3.01 percent. Ten-year note yields were little changed at 1.99 percent after gaining as much as nine basis points. Two-year note yields fell one basis point to 0.23 percent.

Fed View

“Economic growth strengthened somewhat in the third quarter, reflecting in part a reversal of the temporary factors that had weighed on growth earlier in the year,” the Federal Open Market Committee said today in Washington after a two-day meeting. At the same time, it repeated that “there are significant downside risks to the economic outlook, including strains in global financial markets.”

The central bank left intact its pledge to leave its target interest rate in a range of zero to 0.25 percent until 2013.

Fed Bank of Chicago Charles Evans has pushed for his colleagues to inject more stimulus into the economy since September and this week he broke ranks with most of them, casting the U.S. central bank’s first dissent in favor of further easing since December 2007.

The central bank announced in September that it would replace $400 billion of short-term debt with longer-term Treasuries to contain borrowing costs. The Fed previously purchased $2.3 trillion in debt in two rounds of quantitative easing.

More Easing

“The market was looking for QE3,” said William Larkin, a fixed-income money manager who helps oversee $500 million at Cabot Money Management Inc. in Salem, Massachusetts. “They are going to act if necessary. They are going to be a bit flexible, but the economy today is too strong.”

Fed officials lowered their outlook for U.S. economic growth in 2012 and forecast that unemployment will average from 8.5 percent to 8.7 percent in the final three months of next year.

Treasuries rallied earlier this week as demand for safety soared after Greek Prime Minister George Papandreou called a referendum and a parliamentary confidence vote, fueling concern the country will be pushed into default if voters reject it. Thirty-year yields slid 46 basis points during the rally, the biggest three-day drop since credit markets froze in November 2008.

Treasuries have returned 8.8 percent this year, the most since U.S. government debt returned 14 percent in 2008 in the midst of the financial crisis, according to Bank of America Merrill Lynch index data, outperforming the 1.8 percent drop in the Standard & Poor’s 500 Index.

Jobs Data

A Labor Department report on Nov. 4 is forecast to show the U.S. added 95,000 jobs, according to 84 economists in a separate survey, compared with 103,000 the previous month.

The unemployment rate is forecast to remain at 9.1 percent from the previous month, economists said before the Labor Department reports the figures that day.

Companies added workers in October, easing concern the job market is stagnating in the third year of the U.S. recovery, according to a private report based on payrolls.

The 110,000 increase followed a revised 116,000 gain the prior month, Roseland, New Jersey-based ADP Employer Services said today. The median forecast of economists surveyed by Bloomberg News called for a advance of 100,000.

Euro Moves

Papandreou was summoned to Cannes, France on the eve of a Group of 20 summit where he will hear from French President Nicolas Sarkozy that the “only way to resolve Greek debt problems” is through a deal hammered out last week in crisis meetings.

Treasuries rallied earlier this week as demand for safety soared after Papandreou called a referendum and a parliamentary confidence vote, fueling concern the country will be pushed into default if voters reject it. Thirty-year yields slid 46 basis points during the rally, the biggest three-day drop since credit markets froze in November 2008.

The Treasury announced it will sell $32 billion of three- year notes on Nov. 8, $24 billion of 10-year debt on the following day and $16 billion of 30-year bonds on Nov. 10. The amounts of the auctions are unchanged from an August grouping of the same maturities. The Treasury will raise $48 billion in new cash from the sales.

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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