Treasuries Recover Most of Losses That Followed Fed
Treasuries regained most of the losses posted after the Federal Reserve announced more stimulus as traders bet slowing global growth will make it difficult for policy makers to reach their goal of lowering unemployment.
Yields on benchmark 10-year notes dropped 11 basis points this week, putting them below the level reached just before the Fed said on Sept. 13 it would keep borrowing rates unchanged into 2015 and buy mortgage securities. Prices fluctuated earlier today as speculation European leaders were making progress on the region’s debt crisis reduced the refuge appeal of U.S. debt.
“We’ve seen a reversal after the substantial selloff as the market has come back to the reality that we still have a slowing global economy and ongoing European issues, which has kept the Treasury market bid,” said Christopher Sullivan, who oversees $2 billion as chief investment officer at United Nations Federal Credit Union in New York.
Yields on 10-year notes dropped one basis point, or 0.01 percentage point, for the day to 1.75 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices, after rising earlier as much as three basis points. They touched 1.72 percent yesterday, the lowest since Sept. 13. The 1.625 percent security due in August 2022 rose 3/32, or 94 cents per $1,000 face amount, to 98 27/32.
Benchmark 10-year notes yielded 1.76 percent on Sept. 12, the day before the Fed announced a third round of bond purchases to spur economic growth. The yields rose to a four-month high of 1.89 percent on Sept. 14.
Thirty-year bond yields dropped 15 basis points this week. They were little changed today at 2.94 percent, after rising earlier as much as four basis points.
Hedge-fund managers and other large speculators reversed from a net-long position to a net-short position in 30-year bond futures in the week ended Sept. 18, according to U.S. Commodity Futures Trading Commission data. Speculative short positions, or bets prices will fall, outnumbered long positions by 72 contracts on the Chicago Board of Trade. Last week, traders were net-long 20,088 contracts.
The long-bond yields traded today at their 200-day moving average of 2.94 percent after briefly reaching below it yesterday. The average is seen by some traders as a barrier to further decreases.
Treasuries rose for the first week this month as a gauge of manufacturing in the New York area tumbled to a three-year low in September and purchasing-manager indexes showed both Chinese and euro-area manufacturing contracted. Another report showed manufacturing in the Philadelphia area shrank for a fifth straight month.
The gap between 10-year yields and Treasury Inflation Protected Securities, an indicator of trader expectations for inflation over the life of the debt, known as the 10-year break- even rate, narrowed this week the most in a year as traders scaled back bets the Fed’s latest stimulus will lead to rising consumer prices.
The yield difference decreased 15 basis points on the week, the most since Sept. 23, 2011. It was 2.50 percentage points today, after climbing to 2.73 percentage points on Sept. 17, the most since May 2006.
Volatility was at almost the lowest level since May. Bank of America Merrill Lynch’s MOVE index, which measures price swings based on options, was at 59.6 basis points today, after sliding Sept. 19 to 57.5 basis points, the least since May 7. It touched a 2012 high of 95.4 basis points on June 15. The average over the past decade is 100.3 basis points.
The gap between 10-year interest-rate swap rates and similar-maturity Treasury rates was 1.4 basis points, after narrowing yesterday to minus 0.06 basis point, the first time since September 2010 that yields on the swaps fell below those on Treasuries. A negative reading indicates increased demand for investments outside the Treasury market.
Investors use swaps to exchange fixed and floating interest-rate obligations. The difference, the gap between the fixed component and the Treasury rate, is a gauge of investor demand for higher-yielding assets. The spread is usually positive because investors demand more yield to compensate for the risk of a swap, a transaction between banks, than they do to lend to the U.S. government.
Ten-year yields rose earlier from a one-week low amid speculation Spanish and European Union officials were working on plans to trigger European Central Bank bond purchases to boost Spain’s economy.
European governments “need to proceed toward a full accomplishment of economic and monetary union and create conditions for growth and the creation of jobs,” according to a statement from Italian Prime Minister Mario Monti’s office following a meeting with his Spanish counterpart, Mariano Rajoy, in Rome today.
Italian and Spanish 10-year bond yields have dropped more than 1 percentage point since ECB President Mario Draghi first signaled Aug. 2 the bank would buy debt of distressed euro-bloc nations in tandem with EU’s bailout funds to curb the 17-nation region’s financial turmoil.
While Monti championed the EU bond-buying plan, the ECB’s insistence on imposing conditions on any aid has left him and Spain’s Rajoy reluctant to seek a bailout, a requirement.
“The market will be looking at headline risk out of Europe,” said Justin Lederer, an interest-rate strategist at Cantor Fitzgerald LP in New York, one of 21 primary dealers that trade with the Fed.
The U.S. central bank said Sept. 13 it would purchase $40 billion of mortgage-backed bonds a month to spur economic growth and reduce unemployment until the recovery is well-established.
Fed Bank of Atlanta President Dennis Lockhart said the central bank may ease beyond its current plan to buy mortgage- backed securities if the labor market doesn’t show signs of greater strength. The unemployment rate has been stuck above 8 percent for 43 consecutive months.
“MBS purchases will continue until we see a better employment situation,” Lockhart said today in a speech in Atlanta. “If we do not see improvement, more action may be taken. And inflation will be monitored closely.”
The Fed is also swapping shorter-term Treasuries in its holdings with those due in six to 30 years to hold down borrowing costs. It bought $1.8 billion of Treasuries today maturing from November 2022 to February 2031 as part of the program, according to Fed Bank of New York’s website.
The Treasury plans to auction $35 billion of two-year notes Sept. 25, the same amount of five-year debt the next day and $29 billion of seven-year securities Sept. 27.
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