Treasury Yield Curve Flattens After Fed’s Twist Extension
The gap between yields on 10- and 30-year Treasuries narrowed for a second week after the Federal Reserve extended its Operation Twist program to replace short- term notes in its holdings with longer-term debt to spur growth.
U.S. government securities fell amid speculation European leaders will make progress on curbing their sovereign-debt crisis. The European Central Bank loosened collateral rules to ease access to its funds, and leaders of Germany, France, Italy and Spain agreed to cooperate on a growth plan for the euro bloc. The Treasury will auction $99 billion of notes next week.
“The extension of Operation Twist and further buying on the long end is a recipe for a flatter curve,” said Larry Milstein, managing director in New York of government and agency debt trading at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors. “Yields have risen a bit as the Greek elections passed without Europe blowing up, and there is positive chatter coming from the region.”
The difference, called the yield curve, narrowed two basis points, or 0.02 percentage point, to 109 basis points, from 111 on June 15. It decreased last week less than one basis point as investors speculated the Fed would extend Operation Twist. The average over the past year is 1.15 basis points.
Benchmark 10-year yields climbed 10 basis points to 1.67 percent yesterday in New York, according to Bloomberg Bond Trader data. The securities yielded 1.58 percent on June 15. The 1.75 percent notes due May 2022 fell 7/8, or $8.75 per $1,000 face amount, to 100 22/32.
Thirty-year bond yields increased eight basis points to 2.76 percent.
Volatility in the Treasuries market tumbled for the first week in almost two months, according to Bank of America Merrill Lynch’s MOVE index. It dropped 20 basis points, the most since June 2009, to 75.1 basis points, the lowest level in June. It reached a 2012 high of 95.4 basis points June 15, and touched a low for the year at 56.7 on May 7. The index measures price swings based on options.
A valuation measure showed U.S. 10-year notes becoming less expensive. The term premium, a model created by economists at the Federal Reserve, was negative 0.81 percent yesterday after reaching negative 0.94 percent on June 1, the costliest level ever, as investors sought refuge from Europe’s turmoil. A negative reading indicates investors are willing to accept yields below what’s considered fair value. The average over the past decade is 0.50 percent.
Fed policy makers, after a two-day meeting that ended June 20, extended Operation Twist through year-end expanded it by $267 billion. The program had been scheduled to purchase $400 billion of longer-term Treasuries through the end of June.
“The Fed’s decision is a volatility crusher,” Carl Lantz, head of interest-rate strategy in New York at Credit Suisse Group AG, said June 20. The firm is one of 21 primary dealers that trade with the central bank. “It’s more beneficial for the long end than the intermediate sector, which means more flattening of the curve and strength in the long end.”
While the central bank refrained from introducing a third round of large-scale debt purchases under quantitative easing, it lowered its economic forecasts. Chairman Ben S. Bernanke said policy makers are prepared to consider additional steps to spur growth and employment, including further asset purchases.
Treasuries extended losses yesterday after the ECB said it will relax some rules on the collateral banks can offer in exchange for central-bank funds. The Governing Council will lower rating thresholds and amend eligibility requirements for some asset-backed securities, the Frankfurt-based central bank said in an e-mailed statement.
German, Italian, French and Spanish leaders agreed before a European Union summit June 28-29 to cooperate on a growth plan of as much as 130 billion euros ($163 billion) for the 17-nation currency bloc. They spoke to reporters yesterday after meeting in Rome. No specifics about the plan were offered.
German Chancellor Angela Merkel said growth and employment must become the focus of European leaders and called for a closer political union. Greek leaders established a three-party coalition government following two elections.
“There are positive signs coming from the euro zone that are weighing on Treasuries, and policy makers are beginning to make some good steps,” said Sean Murphy, a trader at the primary dealer Societe Generale SA in New York. “Still, there is a lot of uncertainty, and the Fed’s extension of Operation Twist is helping to cap any selloff. The market is settling in around these levels, as we will be here for a while.”
Treasuries rose earlier in the week as data showed more Americans than forecast filed claims for jobless benefits, manufacturing in the Philadelphia region shrank and sales of existing homes fell. A Chinese output gauge also indicated contraction and euro-area manufacturing shrank.
The government will sell $35 billion of two-year debt on June 26, the same amount of five-year securities the next day and $29 billion of seven-year notes on June 28.
Hedge-fund managers and other large speculators decreased their net-short position in 10-year note futures in the week ending June 19, according to U.S. Commodity Futures Trading Commission data.
Speculative short positions, or bets prices will fall, outnumbered long positions by 22,997 contracts on the Chicago Board of Trade. Net-short positions fell by 72,388 contracts, or 76 percent, from a week earlier, the Washington-based commission said in its Commitments of Traders report.
U.S. government debt returned 2.9 percent from the end of March through yesterday, according to the Bank of America Merrill Lynch Treasury Master index, amid concern Europe’s financial woes were worsening and U.S. growth was slowing. The 10-year note yield reached a record low of 1.44 percent on June 1 before climbing on bets policy makers and central banks would act to stem the crisis. The Standard & Poor’s 500 (SPX) Index lost 4.7 percent this quarter as of yesterday.
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