Treasuries Advance Before Bernanke Speaks at Jackson Hole

Treasuries rose, pushing 10-year yields almost to a two-week low, on speculation Federal Reserve Chairman Ben S. Bernanke will use his Aug. 31 speech in Jackson Hole, Wyoming, to outline the case for more bond purchases.

Five-year yields extended declines from last week before the U.S. auctions the securities among $99 billion of note sales this week. Chicago Fed President Charles Evans called for another round of asset purchases under quantitative easing. The central bank has already conducted two rounds to pump cash into the banking system.

“More people are feeling comfortable that the Fed’s going to do more QE,” said Charles Comiskey, head of Treasury trading in New York at Bank of Nova Scotia (BNS), one of 21 primary dealers that trade Treasuries with the central bank. “There’s a lack of sellers. The auctions should go fine. These markets are manic -- they move on any piece of news.”

The benchmark 10-year yield fell four basis points, or 0.04 percentage point, to 1.65 percent at 5 p.m. in New York, according to Bloomberg Bond Trader data. It touched 1.64 percent. The price of the 1.625 percent security due in August 2022 rose 10/32, or $3.13 per $1,000 face amount, to 99 3/4.

The yield slid 12 basis points last week, touching 1.63 percent on Aug. 24, the lowest since Aug. 13. It dropped to a record of 1.38 percent on July 25, compared with the average of 3.73 percent for the past decade, before reaching a three-month high of 1.86 percent on Aug. 21.

Treasury five-year yields declined two basis points to 0.68 percent after losing nine basis points last week. Thirty-year bond yields dropped four basis points to 2.76 percent.

Volume Drops

Treasury trading volume reported by ICAP Plc, the largest inter-dealer broker of U.S. government debt, dropped to about $109 billion, from $181 billion on Aug. 24. Daily volume has averaged $238 billion this year.

The butterfly chart spread formed by seven-, 10- and 30- year Treasury yields suggests that 10-year notes will outperform as U.S. government debt rises, according to CRT Capital Group LLC, citing technical analysis.

The spread, which measures how the 10-year note is performing against the other two securities, was at negative 56 basis points today. It may reach negative 59 basis points, a level last seen in May, if it drops below negative 56.5 basis points, Ian Lyngen, a government-bond strategist at CRT in Stamford, Connecticut, said in a telephone interview.

A negative reading indicates the market is bullish on the benchmark 10-year note.

More Expensive

Treasuries are the most expensive in three 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 at negative 0.87 percent today, the costliest since Aug. 6. It reached negative 0.70 percent on Aug. 16, the least expensive since May. A negative reading indicates investors are willing to accept yields below what’s considered fair value.

The Treasury will sell $35 billion of two-year debt tomorrow, the same amount of five-year notes the following day and $29 billion of seven-year securities on Aug. 30.

Demand dropped below 2012 averages at the government’s last auctions of notes and bonds this month. A $24 billion sale of 10-year notes on Aug. 8 drew a bid-to-cover ratio, a gauge of demand that compares the amount bid with the amount offered, of 2.49, the lowest level since August 2009. The year-to-date average ratio is 3.09. A $16 billion offering of 30-year bonds on Aug. 9 had a ratio of 2.41, versus 2.6 for the year.

Good Demand

“These auctions will go very well,” Ray Remy, head of fixed income in New York at the primary dealer Daiwa Capital Markets America Inc., said of the sales scheduled for this week. “There will be plenty of demand for fives and sevens because there’s a lot of dovish sentiment out of the Federal Open Market Committee minutes.”

Treasury 10-year notes snapped the longest weekly losing streak since 2010 on Aug. 24, rising for the first time in five weeks amid speculation the Fed will buy more debt under quantitative easing as global economic growth slows, renewing demand for safety.

Bernanke is scheduled to speak at the end of the week at the Kansas City Fed’s annual economic symposium in Jackson Hole.

“There is scope for further action by the Federal Reserve to ease financial conditions and strengthen the recovery,” he said in a letter dated Aug. 22 to Representative Darrell Issa, the California Republican who chairs the House Oversight and Government Reform Committee.

‘Additional Accommodation’

Bernanke repeated the statement from the FOMC’s Aug. 1 meeting that the Fed will provide “additional accommodation as needed.” The central bank bought $2.3 trillion of Treasury and mortgage debt from 2008 to 2011 to spur growth.

“You know he wants to ease; the question is when,” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities Inc. in New York. “It’s a matter of timing and what’s going to give him the biggest bang for the easing dollar.”

The Chicago Fed’s Evans urged the central bank to begin a third round of debt purchases and to keep buying until U.S. unemployment declines for at least six months.

“These could be open-ended purchases, meaning that they would continue at a certain rate until there was clear evidence of improvement in economic conditions,” Evans said today in a speech in Hong Kong. “To me, one example of clear evidence would be a resumption of relatively steady monthly declines in unemployment for two or three quarters.”

Labor Market

The U.S. added 120,000 jobs in August, versus 163,000 in July, economists in a Bloomberg News survey forecast before a Labor Department report on Sept. 7. The unemployment rate will remain above 8 percent, where it’s been since 2009.

The Fed is implementing a program to put downward pressure on borrowing costs by exchanging shorter-maturity Treasuries in its holdings for longer-term debt. It bought $1.8 billion of Treasuries today due from February 2036 to August 2042 as part of the plan, known as Operation Twist.

QE announcements have usually increased inflation expectations and that’s caused a steepening of the yield curve, said Terry Belton, global head of fixed-income and foreign- exchange research at JPMorgan Chase & Co. in New York, in a company video presentation. “The 10s-30s curve has steepened each of the last three balance-sheet expansions by the Fed,” he said, recommending investors add positions in the trade.

The gap between yields on 10- and 30-year Treasuries, the yield curve, was little changed today at 1.109 percentage points after widening to 1.121 percentage points on Aug. 17, the most on a closing basis since June 11.

The difference in yields between 10-year notes and comparable Treasury Inflation Protected Securities, which represents traders’ expectations for the inflation rate over the life of the securities and is known as the break-even rate, was 2.31 percentage points today, near the highest in more than two weeks. It’s down from the 2012 high of 2.45 percentage points on March 20.

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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