Treasuries Rise as Europe Crisis Lifts Demand, QE3 Odds
Treasuries rose, rebounding from yesterday’s biggest slide in almost three weeks, as weaker-than- expected European bond auctions added to concern the region’s sovereign-debt crisis wasn’t resolved, spurring haven demand.
Ten-year yields dropped from the highest level in almost two weeks as investors speculated yesterday’s rise in reaction to minutes of the Federal Reserve’s March 13 meeting that reduced expectations for quantitative easing, or additional asset purchases, won’t be sustained without stronger-than- forecast economic data. The Fed bought $6.62 billion of Treasuries maturing from April 2018 to February 2042 in two operations today.
“The problems in Europe aren’t over,” said Sean Murphy, a trader at Societe Generale in New York, one of the 21 primary dealers that trade with the Fed. “We’re getting a re-think of the reaction to the FOMC minutes. It’s not as hawkish as was feared. The reality is that it’s more data dependent from here.”
The 10-year yield fell eight basis points, or 0.08 percentage point, to 2.22 percent at 4:59 p.m. New York time, according to Bloomberg Bond Trader prices. The 2 percent note due February 2022 rose 21/32, or $6.56 per $1,000 face amount, to 98 1/32. The yield jumped 12 basis points yesterday, the most since March 14.
The Stoxx Europe 600 index dropped 2 percent and the Standard & Poor’s 500 Index declined 1 percent.
The yield on Spanish 10-year bonds rose as much as 26 basis points, to 5.71 percent, after it sold 2.59 billion euros ($3.41 billion) of bonds, compared with a maximum target of 3.5 billion euros. The yield on Italian 10-year securities gained as much as 25 basis points to 5.40 percent.
“It shows the fragile state of what’s going on in Europe,” said Brian Edmonds, head of interest rates at the primary dealer Cantor Fitzgerald LP in New York.
Treasuries remained higher as investors speculated the Fed may still follow through with more purchases.
QE3 might still be on the table if data shows signs of a significant near-term slowdown, although Operation Twist 2 is probably a more viable option, Vincent Reinhart, chief U.S. economist at primary dealer Morgan Stanley, wrote in a note to clients. Operation Twist is a Fed program that replaces shorter- term debt with longer-term securities.
The odds of QE3 over the next few months are 33 percent, down from as high as 75 percent, as Fed minutes released yesterday indicate sentiment for more accommodation has faded, Reinhart wrote.
Fed Bank of Richmond President Jeffrey Lacker said financial markets had assigned too high a probability that the Fed would begin a new round of asset purchases.
“While further easing is obviously something that’s conceivable, I wouldn’t favor it unless conditions deteriorated quite substantially,” Lacker, a voting member of the Federal Open Market Committee, told reporters and editors today at the Bloomberg News Washington bureau.
The strengthening U.S. economy is reducing the odds that the central bank will need to add to its monetary accommodation, Fed Bank of San Francisco President John Williams said today after delivering a speech in San Francisco.
Volatility rose today to the highest in a week, a day after Fed minutes dashed speculation policy makers would hint at more asset purchases. Bank of America Merrill Lynch’s MOVE index, which measures Treasury price swings based on options, rose to 84.6 basis points. It touched 69.9 basis points on March 12, the least since July 2007. It rose to 93.3 basis points on March 20, the highest this year.
Not ‘Big Buyers’
“We weren’t big buyers of the notion that there would be another round of QE,” said Chris Ahrens, head interest-rate strategist in Stamford, Connecticut, at primary dealer UBS AG. “The odds of something like that happening were more on the order of 25 percent, 30 percent.”
The volume of Treasury trades handled through ICAP Plc, the biggest broker between banks, dropped to $324 billion from yesterday’s $360 billion, the most since March 15. It rose to a 2012 high of $439 billion on March 14 and touched a 2012 low of $141 billion on Jan. 9.
Figures from ADP Employer Services showed U.S. employment increased by 209,000 last month, compared with a forecast of a gain of 206,000 in a Bloomberg News survey. A gain of 216,000 in February was the biggest in two months.
U.S. payrolls climbed by more than 200,000 in March for a fourth month, economists said before the Labor Department report on April 6.
Ten-year yields will be 2.25 percent by June 30, according to the average forecast in a Bloomberg survey of financial companies with the most recent projections given the heaviest weightings.
Valuation measures show government debt has become more expensive. The term premium, a model created by economists at the Fed, reached negative 0.44 percent today after closing at negative 0.36 percent yesterday, the least expensive since March 22. It reached negative 0.26 percent on March 19, the least expensive since October. A negative reading indicates investors are willing to accept yields below what’s considered fair value.
“Central banks are where bad bonds go to die,” he wrote. “Without QE, the financial markets and then the economy will falter.”
The Fed will probably shift focus to mortgage securities to keep borrowing rates low when Operation Twist ends in June, Gross said March 28 during an interview on Bloomberg Television’s “InBusiness with Margaret Brennan.”
Gross lowered the proportion of U.S. government securities in the fund to 37 percent of assets in February from 38 percent in January, according to a report on the company’s website. He raised mortgages to 52 percent from 50 percent.
The Fed bought $2.3 trillion of securities to lower borrowing costs and spur the economy in two rounds of quantitative easing from December 2008 to June 2011. It has kept its target rate for the so-called federal funds rate that banks charge each other on overnight loans, to a range of zero to 0.25 percent since December 2008.
The European Central Bank today left interest rates unchanged at a record low of 1 percent.
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