Treasury 10-year note yields fell to almost the lowest level this month as Federal Reserve officials suggested policy makers will maintain the current pace of bond purchases to sustain momentum in the economic expansion.
Bonds rose for a second day after Federal Reserve Bank of New York President William C. Dudley said policy makers must “forcefully” push against economic headwinds. Another regional Fed bank president, Atlanta’s Dennis Lockhart, said policy should focus on creating a more dynamic economy. Debate over the U.S. federal budget and the debt ceiling is also renewing concern of a government shutdown, debt default or near-miss that may roil financial markets.
“The move today is driven by the uncertainty in the marketplace, the mixed message that the Fed is providing,” said Sean Simko, who oversees $8 billion at SEI Investments Co. (SEIC) in Oaks, Pennsylvania. “Until we get a single message, we’ll see a bid in the marketplace.”
The benchmark 10-year yield fell three basis points, or 0.03 percentage point, to 2.7 percent at 4:59 p.m. New York time, according to Bloomberg Bond Trader prices. The 2.5 percent note maturing in August 2023 rose 9/32, or $2.81 per $1,000 face amount, to 98 9/32.
The yield dropped 15 basis points last week, the steepest decline since the period ended July 12. The 10-year note yield fell on Sept. 18 to 2.67 percent, the lowest since Aug. 13.
The Treasury is scheduled to sell $33 billion of two-year securities tomorrow, $35 billion of five-year notes the following day and $29 billion of seven-year debt on Sept. 26.
Volatility in Treasuries as measured by the Bank of America Merrill Lynch MOVE index dropped 3 percent to 75.35, the lowest level since Aug. 12. It climbed on Sept. 5 to 114.19, a two-month high. The 2013 average is 71.83.
Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, dropped 17 percent to $225.5 billion, after surging to $459.9 billion on Sept. 18, when the Fed unexpectedly maintained the pace of its bond-buying program known as quantitative easing.
The Fed today purchased $3.7 billion of Treasuries maturing from June 2019 to July 2020 as part of its stimulus program.
“The economy still needs the support of a very accommodative monetary policy,” Dudley, who is vice chairman of the Federal Open Market Committee, said in New York. “Improving economic fundamentals versus fiscal drag and somewhat tighter financial conditions are pulling the economy in opposite directions, roughly canceling each other.”
“Dudley’s comments were pretty dovish across the board,” said Jason Rogan, managing director of U.S. government trading at Guggenheim Securities LLC, a New York-based brokerage for institutional investors. “It’s important to see what their thinking is and how strongly convinced they are on the non-tapering approach.”
Fed Chairman Ben S. Bernanke cited the danger to the economy from the budget battles as one reason the central bank decided not to pull back on its monetary stimulus.
“Upcoming fiscal debates may involve additional risks to financial markets and to the broader economy,” Bernanke said at a Sept. 18 news conference following the Fed’s two-day meeting. Analysts surveyed by Bloomberg News had forecast that the central bank would announce a reduction in bond purchases at the end of the meeting.
Fed Vice Chairman Janet Yellen is the leading candidate to replace Bernanke if he steps down in January, according to a survey by Bloomberg News. Lawrence Summers, who was seen as the probable pick and more likely to tighten monetary policy sooner, withdrew his candidacy.
Lockhart who also spoke in New York, said U.S. monetary policy should focus on creating a more dynamic economy following a recent slowing in growth.
Fed Bank of Dallas President Richard Fisher said the central bank harmed its credibility with the decision last week not to taper $85 billion in monthly bond purchases.
“Doing nothing at this meeting would increase uncertainty about the future conduct of policy and call the credibility of our communications into question,” Fisher, who doesn’t vote on policy this year, said he told the FOMC. “I believe that is exactly what has occurred, though I take no pleasure in saying so,” he said today in San Antonio, Texas.
Treasuries have lost investors 2.95 percent this year through Sept. 20, according to Bloomberg U.S. Treasury Bond index. The securities returned 2.2 percent in 2012.
The market for U.S. government debt has yet to react to any potential impasse over raising the borrowing ceiling. Treasuries that mature on Oct. 15 yield negative 0.09 percent, compared with negative 0.03 percent two weeks earlier. The rate on debt due Nov. 7 has risen to 0.01 percent from 0.005 percent during that span.
“People are still regrouping,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee. “People are not going to make any major commitments until next week’s economic data. There’s no obvious market impact from the politics, instead it’s the potential drag to the economy. The range on the 10-year yield is 2.68 to 2.78 percent this week.”
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