Treasuries Snap Four-Week Decline on Fed Signals, Europe Outlook

Treasuries snapped a four-week slide after Federal Reserve meeting minutes suggested a weakening economy may lead to more stimulus measures and concern increased that progress toward resolving Europe’s debt crisis stalled.

Hedge-fund managers and other large speculators boosted futures wagers that 10-year notes will rise to the highest level since 2008, a week before Fed Chairman Ben S. Bernanke speaks at a Jackson Hole, Wyoming, conference where he previewed monetary stimulus programs the past two years. Yields declined even as the U.S. prepares to auction $99 billion in notes next week.

“The minutes repriced the market,” said Thomas Connor, president and head of trading at Pierpont Securities Stamford, Connecticut. “I tend to think Bernanke will be somewhat noncommittal, but will keep further easing action on the table.”

The benchmark 10-year note yield dropped 12 basis points this week, or 0.12 percentage point, to 1.69 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. It was the biggest decrease since the five days ended June 1. The yield was little changed today after dropping earlier as much as five basis points to 1.63 percent, the lowest level since Aug. 13. The price of the 1.625 percent security due in August 2022 gained 1 1/8, or $11.25 per $1,000 face amount, to 99 14/32.

Thirty-year bond yields fell 13 basis points, also the most since June 1, to 2.8 percent. They were little changed on the day, after sliding five basis points earlier to 2.74 percent, the least since Aug. 14.

Net Longs

Speculative long positions on 10-year note futures, or bets prices will rise, outnumbered short positions in the week ended Aug. 21 by 97,540 contracts on the Chicago Board of Trade, the most since March 2008. The so-called net-long positions more than tripled from a week earlier, the Washington-based commission said in its Commitments of Traders report.

Treasuries climbed earlier today as investors sought refuge amid concern ECB President Mario Draghi may not announce a definitive bond-purchase program at the bank’s Sept. 6 meeting. A German court is scheduled to rule Sept. 12 on the legality of Europe’s permanent bailout fund, and two central-bank officials said Draghi may wait until after the decision. The officials requested anonymity because the deliberations are not public.

The ECB chief announced on Aug. 2 the bank may intervene in the secondary market to reduce bond yields in countries such as Spain and Italy if they apply to Europe’s bailout fund for aid and accept the conditions attached.

Bonds pared gains on prospects that further Fed stimulus may increase appetite for risk and damp demand for the safety of government securities.

‘Further Action’

Bernanke, in a letter dated Aug. 22 to Representative Darrell Issa, said the Fed has the ability to take additional steps to boost the economy. Issa, a California Republican, chairs the House Oversight and Government Reform Committee.

“There is scope for further action by the Federal Reserve to ease financial conditions and strengthen the recovery,” Bernanke said in the letter.

The Fed chairman is scheduled to speak on Aug. 31 at a Kansas City Fed conference in Jackson Hole, Wyoming, where he may clarify his thinking on the need for stimulus.

The central bank signaled earlier this week it’s ready to take further steps to spur the recovery. Many policy makers said additional stimulus probably will be needed soon unless the economy shows signs of a durable pickup, according to minutes released Aug. 22 of the central bank’s most recent meeting, on July 31-Aug. 1. The central bank bought $2.3 trillion of debt from 2008 to 2011 in two rounds of a stimulus strategy called quantitative easing.

Fed Sale

The Fed sold $7.8 billion today of Treasuries due from May 2015 to November 2015. The action was part of the central bank’s efforts to exchange shorter-term Treasuries in its holdings for those due in six to 30 years to support the economy by putting downward pressure on long-term borrowing costs.

Treasuries have “more room to rally,” according to the Barclays Plc. One of the 21 primary dealers that trade with the Fed. The rally over the past week hasn’t erased the full increase in 10-year yields over the previous four weeks, Ajay Rajadhyaksha and Vivek Shukla, analysts at Barclays Capital in New York, wrote in a client note today. Yields rose 35 basis points over the four weeks ended Aug. 17.

“In the absence of policy surprises in Europe or a sudden shift in the tone of economic data -- we see neither as likely -- the rally is unlikely to reverse,” they wrote.

Investors should sell Treasuries and buy inflation-indexed securities, betting expectations for rising prices continue amid speculation the Fed will add further monetary stimulus, according to Citigroup Inc.

Break-Even Rates

Break-even rates, the yield gap between nominal notes and Treasury Inflation Protected Securities, or TIPS, from one to five years are poised to widen after the Fed’s stimulus signals this week, said Jabaz Mathai, an interest-rate strategist at Citigroup. The five-year break-even rate was 1.93 percentage points today, versus 1.68 on July 25.

Treasuries are almost the most expensive in more than two weeks, according to the term premium, a model created by economists at the Fed that includes expectations for interest rates, growth and inflation. The gauge was negative 0.83 percent today, from negative 0.85 percent two days ago, the most costly since Aug. 6. It reached negative 0.70 percent on Aug. 16, the least costly since May. A negative reading indicates investors are willing to accept yields below what’s considered fair value.

U.S. government securities have lost 0.7 percent this month, paring their 2012 return to 2 percent, according to Bank of America Merrill Lynch’s Treasury Master index.

The Treasury will auction $35 billion of two-year debt on Aug. 28, the same amount of five-year notes the following day and $29 billion of seven-year securities on Aug. 30. The amounts were unchanged from last month’s sales of the securities.

Bonds extended gains earlier after data showed bookings for non-military capital equipment excluding planes slumped 3.4 percent, the most in eight months, a Commerce Department report showed today in Washington.

To contact the reporter on this story: 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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