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Treasuries End Longest Loss Streak Since 2010 on Fed Speculation

Treasuries rose, with 10-year notes snapping the longest weekly losing streak since 2010, amid bets the Federal Reserve will buy more debt under quantitative easing as global economic growth slows, renewing demand for safety.

Ten-year notes gained for the first time in five weeks as hedge-fund managers and other large speculators boosted to the highest level since 2008 futures bets that the securities will rise. Fed Chairman Ben S. Bernanke will speak next week 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.

“Some people believe Bernanke will set the table for more QE,” said Jay Mueller, who manages about $3 billion of bonds at Wells Capital Management in Milwaukee. “The level of uncertainty in terms of policy is very high. The level of policy risk in Europe is also overwhelmingly high. The market has overreacted in both directions.”

The benchmark 10-year yield dropped 12 basis points, or 0.12 percentage point, to 1.69 percent this week in New York, the most since June 1, according to Bloomberg Bond Trader prices. The price of the 1.625 percent security maturing in August 2022 gained 1 1/8, or $11.25 per $1,000 face amount, to 99 14/32.

The 10-year yield rose 35 basis points in the preceding four weeks, the longest stretch since the five days ended Dec. 24, 2010. It touched a record low 1.379 percent on July 25.

The 30-year bond yield slid 13 basis points, also the most since June 1, to 2.8 percent. It gained 39 basis points over the previous four weeks, the longest stretch since October.

Gain Pared

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.

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 were almost the most expensive in more than two weeks yesterday, 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 0.84 percent, from negative 0.85 percent two days earlier, the most costly since Aug. 6. It reached negative 0.70 percent on Aug. 16, the least costly since May. A negative reading indicates that investors are willing to accept yields below what’s considered fair value.

European Turmoil

U.S. government bonds also climbed this week as investors sought refuge amid concern whether European leaders will curb the euro bloc’s almost three-year-old debt crisis.

European Central Bank President Mario Draghi may not announce a definitive bond-purchase program at the bank’s Sept. 6 meeting, two central-bank officials said yesterday. A German court is set to rule Sept. 12 on the legality of Europe’s permanent bailout fund, and Draghi may wait until after the decision, the officials said. They requested anonymity because the deliberations aren’t 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.

Jackson Hole

Bernanke is scheduled to speak on Aug. 31 at the Kansas City Fed’s economic-policy conference at Jackson Hole, where he may clarify his thinking on the need for stimulus.

The Fed signaled this week it’s ready to take further steps to spur the economic 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 QE. It has also kept its benchmark interest rate at zero to 0.25 percent since December 2008 and has pledged to hold it there until at least 2014.

“The minutes re-priced the market, and we’ve got to wait and see the data next week,” said Thomas Connor, president and head of trading at Pierpont Securities Holdings LLC in Stamford, Connecticut.

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

‘Further Action’

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

U.S. gross domestic product rose in the second quarter by 1.7 percent on an annualized basis, according to the forecast of 66 economists before the Commerce Department reports the data on Aug. 29. While the figure is larger than the initial estimate of 1.5 percent released last month, it remained lower than the 2 percent growth in the first quarter and the 4.1 percent pace from October through December.

China’s purchasing managers’ index fell to 47.8 in August from a final reading of 49.3 for July, HSBC Holdings Plc and Markit Economics said Aug. 23. A euro-area composite index based on a survey of purchasing managers in services and manufacturing was little changed at 46.6 this month, from 46.5 in July, Markit Economics said in London the same day. Figures below 50 show contraction.

The U.S. 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.

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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