U.S. Bonds Gain in Longest Streak Since 2008 on Growth Pessimism

Treasury 30-year bonds rose for a seventh day, the longest streak in almost four years, after Philadelphia Federal Reserve Bank President Charles Plosser said the central bank’s new debt purchases probably won’t boost economic growth.

U.S. government securities advanced as risk appetite waned amid bets Europe’s debt crisis is worsening. Gains were tempered by data showing U.S. consumer confidence and home prices climbed and as the U.S. sold $35 billion of two-year debt in the first of three note auctions this week totaling $99 billion. The Fed said Sept. 13 it will buy $40 billion a month of mortgage-backed securities to boost the economy and cut unemployment.

“The market is still bid, and we are seeing more of the same with respect to concern over global growth,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors. “The reality is we are still looking at a very slow global growth and a lot of uncertainty.”

The 30-year bond yield dropped four basis points, or 0.04 percentage point, to 2.85 percent at 4:39 p.m. New York time, according to Bloomberg Bond Trader data. Its seven-day decline was the longest since the eight days ended Dec. 4, 2008. The price of the 2.75 percent security due in August 2042 rose 27/32, or $8.44 per $1,000 face amount, to 97 30/32.

The benchmark 10-year note yield fell four basis points to 1.67 percent. It was the lowest level since Sept. 11. The current two-year note yield was little changed at 0.26 percent.

Auction Yield

The auction of two-year notes drew a yield of 0.273 percent, matching the average forecast in a Bloomberg News survey of seven of the Fed’s 21 primary dealers. The record sale low was 0.220 in July. Today’s bid-to-cover ratio, which gauges demand by comparing total bids with the amount of debt offered, was 3.60, versus an average of 3.78 at the past 10 sales.

The Standard & Poor’s 500 Index dropped 1.1 percent, after rising 0.4 percent earlier.

Plosser said a speech today in Philadelphia that the new bond buying probably won’t increase hiring and may hurt the central bank’s credibility.

Economic research indicates that additional asset purchases are “unlikely to reduce long-term interest rates by a significant amount” and that lowering rates “by a few more basis points” won’t spur growth and hiring, said Plosser, who doesn’t have a vote on policy this year. The U.S. economy is growing “at a moderate pace” and probably will expand by about 3 percent in 2013 and 2014, he said.

Mortgage Bonds

The Fed said Sept. 13 it will buy mortgage bonds until the economic recovery is well-established. It also extended pledge to keep its benchmark interest rate at virtually zero until 2015 to support economic growth and reduce an unemployment rate stuck above 8 percent for 43 months.

“The Fed’s decision to buy MBS has created some interesting changes in market dynamics,” said Thomas Simons, a government-debt economist in New York at Jefferies Group Inc., which as a primary dealer is required to bid at U.S. debt offerings. “The market is still trying to find its way in this new environment.”

At today’s auction, indirect bidders, an investor category that includes foreign central banks, bought 27.2 percent of the securities, compared with an average of 31.7 percent at the past 10 offerings.

Direct bidders, non-primary-dealer investors that place their bids directly the sale, bought 17.5 percent, versus an average of 11.6 percent for the past 10 auctions.

More Auctions

The Treasury is due to auction $35 billion of five-year securities tomorrow and will sell $29 billion of seven-year notes on Sept. 27.

Two-year notes have returned 0.2 percent this year, compared with a 1.9 percent gain by Treasuries overall, according to Bank of America Merrill Lynch indexes. The two-year securities returned 1.5 percent in 2011, while Treasuries overall rose 9.8 percent.

Treasuries traded at the most expensive level in almost three weeks. The 10-year term premium, a model created by economists at the Fed that includes expectations for interest rates, growth and inflation, was negative 0.92 percent, the most costly since Sept. 5. A negative reading indicates investors are willing to accept yields below what’s considered fair value. The average for 2012 is negative 0.74 percent.

Bonds rallied earlier today after Spanish borrowing costs rose at a debt sale, boosted speculation Spain may soon ask the European Central Bank for a rescue through its bond-purchase program. The International Monetary Fund said the outlook for Greece worsened.

‘At Forefront’

“Europe is still at the forefront as far as the concerns for the market,” said Sean Murphy, a trader at the primary dealer Societe Generale SA in New York.

Treasuries pared those gains after the Conference Board’s index of confidence increased to 70.3 in September, a seven- month high, from 61.3 in August, figures from the New York-based private research group showed today. The median forecast in a Bloomberg survey called for 63.1.

The S&P/Case-Shiller index of home prices in 20 cities rose 1.2 percent in July from a year earlier, the biggest 12-month advance since August 2010.

To contact the reporter on this story: Cordell Eddings in New York at ceddings@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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