Five-Year Treasury Yields Near Record Low After Fed Pledges to Hold Rates

Treasury five-year yields held a two-day decline after sliding to a record yesterday, following the Federal Reserve’s announcement that it plans to keep its benchmark interest rate low until at least late 2014.

The difference between five- and 10-year rates widened to 1.21 percentage points, the most since Oct. 28. Policy makers are “prepared to provide further monetary accommodation” and bond buying is “an option that’s certainly on the table,” Fed Chairman Ben S. Bernanke said after officials gathered for a meeting yesterday. The Treasury Department is scheduled to sell $29 billion of seven-year securities today.

“By keeping rates low for a longer period, beyond two years, the five-year will benefit most,” said Bin Gao, head of rate research for Asia and the Pacific at Bank of America Merrill Lynch in Hong Kong. “It increases the inflation risk, so 10-years will not rally that much.” The company is one of the 21 primary dealers that trade with the Fed.

Yields on 10-year notes fell one basis point to 1.99 percent at 9:55 a.m. in Tokyo, according to Bloomberg Bond Trader prices. The 2 percent securities maturing in November 2021 rose 2/32, or 63 cents per face amount, to 100 1/8.

The yield on the five-year note was little changed at 0.81 percent after dropping to a record of 0.76 percent yesterday.

The difference between rates on five-year notes and Treasury Inflation Protected Securities, a reflection of traders’ outlook for consumer prices, rose to as high as 1.79 percentage points, the most since Nov. 14.

Fed Forecasts

Policy makers are “prepared to provide further monetary accommodation if employment is not making sufficient progress towards our assessment of its maximum level, or if inflation shows signs of moving further below its mandate-consistent rate,” Bernanke said at a news conference yesterday after a Federal Open Market Committee meeting in Washington.

The Fed lowered its forecast for growth this year to 2.2 percent to 2.7 percent, down from a projection of 2.5 percent to 2.9 percent in November. It predicted the economy next year will expand 2.8 percent to 3.2 percent, down from a previous forecast of 3 percent to 3.5 percent.

In a separate statement of its long-range goals and strategy, the FOMC specified a 2 percent goal for inflation, as measured by the annual change in the price index for personal consumption expenditures.

To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net; Kristine Aquino in Singapore at kaquino1@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net

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