Yields had climbed earlier on speculation Spain was moving closer to seeking a bailout from the European Union, diminishing the need for a haven from further turmoil in global financial markets. The Fed bought $1.9 billion of Treasuries due from February 2036 to August 2042 as part of its Operation Twist program to extend the duration of is U.S. government-debt holdings.
“The Spanish bailout request is not imminent,” said Priya Misra, head of U.S. rates strategy in New York at Bank of America Corp.’s Bank of America Merrill Lynch unit, one of 21 primary dealers that trade with the Fed. The Treasury gains came as “bunds also had a similar move,” she said. “Things are more in line with Europe.”
Treasury 30-year yields fell less than one basis point, or 0.01 percentage point, to 2.82 percent at 5 p.m. New York time, according to Bloomberg Bond Trader data. The 2.75 percent security due August 2042 gained 2/32, or 63 cents per $1,000 face amount, to 98 21/32. The yield touched 2.78 percent on Sept. 28, matching the low since it reached 2.73 percent on Sept. 7.
Benchmark 10-year yields fell one basis point to 1.62 percent. The yield has dropped from 1.87 percent on Sept. 14, the day after the Fed said it would buy $40 billion a month of mortgage bonds until the economy has demonstrated it’s in full recovery.
“Price action in the market is more and more dominated by Fed activity,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “In this environment, it’s becoming more and more of a factor.”
The Spanish 10-year bond yield dropped 13 basis points to 5.75 percent today as Rajoy, asked at a press conference in Madrid if a bailout request was imminent, said: “No.”
Rajoy is weighing the terms of a Sept. 6 proposal by the European Central Bank president to buy bonds of cash-strapped nations including Spain if they make for a formal aid request from the euro region’s government-run rescue funds.
The German government 10-year debt yield declined from its intraday high of 1.49 percent to close at 1.46 percent after Rajoy’s statement.
“The European crisis persists, the upcoming fiscal cliff begets uncertainty and the continuation of the trend of weaker economics we have seen over the last two to three months continues,” said Donald Ellenberger, who oversees about $10 billion as co-head of government and mortgage-backed securities at Federated Investors in Pittsburgh. “Add the Fed taking duration out of the market, and it makes for a recipe for lower yields.”
The fiscal cliff refers to U.S. budget negotiations, including automatic tax increases and spending cuts that may be triggered if deficit-reduction efforts fail.
Treasuries have returned 0.6 percent since the end of June, trailing behind a 5 percent gain by Spanish counterparts, according to Bank of America Merrill Lynch indexes. German bonds gained 1.2 percent in the same period.
The U.S. jobless rate rose to 8.2 percent last month from 8.1 percent in August, according to the median forecast of 82 economists surveyed by Bloomberg News before the Labor Department report Oct. 5. Payrolls increased by 115,000 in September, according to a separate survey.
A report tomorrow from ADP Employer Services will say U.S. companies hired 140,000 workers in September, versus 201,000 in August, a survey showed. Initial claims for jobless insurance rose last week, a government report due in two days will say, economists estimated.
Pacific Investment Management Co.’s Bill Gross said the U.S. will no longer be first destination of global capital in search of safe returns unless the gap between spending and debt is addressed.
Major nonpolitical organizations agree that “when it comes to debt and to the prospects for future debt, the U.S. is no ’clean dirty shirt,’” Gross wrote in his monthly investment outlook posted on the Newport Beach, California-based Pimco’s website today. “The U.S., in fact, is a serial offender, an addict whose habit extends beyond weed or cocaine and who frequently pleasures itself with budgetary crystal meth.”
The International Monetary Fund, the Congressional Budget Office and the Bank of International Settlements compute a “fiscal gap,” which is a deficit that must be closed either with spending cuts, tax increases or a combination of both, which keeps a country’s debt/GDP ratio under control, wrote Gross, the manager of the world’s biggest bond fund.
The Fed said Sept. 13 that it will buy $40 billion of mortgage bonds a month until the U.S. sees what Chairman Ben S. Bernanke described as an “ongoing, sustained improvement in the labor market.” The central bank also said it will probably hold the federal funds rate near zero at least through mid-2015.
Investors initially increased their inflation expectations on the Fed plan.
Bernanke yesterday defended his unprecedented debt purchases and said he is concerned that the economy isn’t adding jobs fast enough.
The difference between yields on 10-year notes and same- maturity Treasury Inflation-Protected Securities widened to 2.73 percentage points on Sept. 17, the highest level since May 2006. The rate, which measures how much traders anticipate consumer prices will rise over the life of the debt, narrowed to 2.48 percentage points today.
U.S. bonds rose earlier after former Fed Chairman Paul Volcker said the central bank’s latest mortgage-bond-buying program isn’t creating inflationary pressure.
“The basic situation is not an inflationary situation,” Volcker said yesterday in New York. The Fed’s latest bond-buying plan is “not going to have a profound effect on the economy and it’s not going to have any effect on inflation in the short run,” he said.
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