Treasuries Erase Losses as Bernanke Eases QE Tapering Concern
Treasuries erased losses after Federal Reserve Chairman Ben S. Bernanke soothed concern that policy makers are moving closer to ending asset purchases sooner that most investors anticipated.
Yields (USGG10YR) had climbed after minutes of the Fed’s June meeting showed about half of officials indicated it would be would be appropriate to end bond buying late this year. Speculation on the timing of the eventual end of the Fed’s monthly buying of $85 billion in Treasuries and mortgage-backed debt helped to push yields on the government’s $21 billion in 10-year notes to the highest since July 2011.
“Bernanke didn’t indicate tapering is happening sooner than expected, which has brought the market somewhat off the low,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “It’s all still a wait and see approach.”
The yield on the 10-year note was little changed at 2.63 percent at 5 p.m. in New York, after rising to as high as 2.68 percent following the release of the minutes. The price of the 1.75 percent note maturing in May 2023 rose 2/32, or 63 cents per $10,000 face value, to 92 14/32. The yield climbed to 2.75 percent on July 8, the highest level since August 2011.
In what’s known as a re-opening of the issue, the $21 billion in additional 10-year notes auctioned today were sold at a high-yield of 2.67 percent, compared with a forecast of 2.68 percent in a Bloomberg News survey of 10 of the Fed’s 21 primary dealers that are required to bid on the securities.
Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, rose by 37.7 percent to $338.6 billion, the highest level since July 5. The 2013 average is $321.7 billion.
Volatility in Treasuries as measured by the Merrill Lynch Option Volatility Estimate MOVE Index ended at 98.98 at 4:02 p.m. in New York, above the one-year average of 64. It touched 117.89 on July 5, the highest since December 2010.
In a discussion about the appropriate path of the balance sheet among the 19 FOMC participants, “about half” indicated “it likely would be appropriate to end asset purchases late this year,” the minutes said. “Many other participants anticipated that it likely would be appropriate to continue purchases into 2014,” the minutes said, while “a few” wanted to slow or stop the purchases at the June meeting.
“About half said it could end this year -- that’s a surprise,” said David Ader, head of U.S. government-bond strategy at CRT Capital Group LLC in Stamford, Connecticut. “That’s the part that has spooked the market.”
Bernanke said in a press conference after the June 18-19 meeting that the central bank may trim its bond-buying program this year and halt it around mid-2014.
The minutes also said “several members judged that a reduction in asset purchases would likely soon be warranted.” Those members said the “cumulative decline in unemployment since the September meeting and ongoing increases in private payrolls” had increased their confidence that the labor market had improved, the minutes showed.
“The Fed is going to taper at some point -- the buying is going to stop at some point,” said Paul Montaquila, fixed-income investment officer with BNP Paribas SA’s Bank of the West. “There was clearly a reaffirming of the non-committal rhetoric we’ve heard for some time. I guess you can connect the dots.”
The bid-to-cover ratio on the 10-year notes sold today, which gauges demand by comparing total bids with the amount of securities offered, was 2.57, compared with 2.53 at the last auction, the lowest since August 2012, and an average of 2.84 for the past 10 sales.
“The auction was a win for investors on a day where trading has been very subdued and people are still waiting to hear from the Fed,” said Scott Graham, head of government-bond trading in Chicago at Bank of Montreal (BMO)’s BMO Capital Markets unit, a primary dealer. “These levels brought in some demand.”
Indirect bidders, an investor class that includes foreign central banks, purchased 38.6 percent of the notes, compared with 51.7 at June’s auction, the highest since December 2011, and an average of 36.9 percent for the past 10 sales.
Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 16.3 percent of the notes, compared with an average of 21.8 percent at the previous 10 auctions.
Ten-year U.S. debt has lost 6.1 percent this year, compared with a 3.1 percent drop in the broader Treasury market, according to Bank of America Merrill Lynch indexes. The benchmark notes returned 4.2 percent in 2012, compared with a 2.2 percent gain by Treasuries overall.
The auction is the second of three offerings this week as the government sells $66 billion of notes and bonds. It auctioned $32 billion of three-year securities yesterday at a yield of 0.719 percent and is due to sell $13 billion of 30-year debt tomorrow.
The sales will raise $5.6 billion of new cash, as maturing securities held by the public total $60.4 billion, according to the Treasury.
Investors have bid $2.94 for each dollar of the $1.13 trillion in U.S. government notes and bonds sold at auction so far this year, according to Treasury data compiled by Bloomberg.
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