Treasury Yields Fall to Records on Fed Plan to Buy $600 Billion

Treasury two- and five-year note yields dropped to records after the Federal Reserve said it would buy an additional $600 billion of U.S. debt to keep borrowing costs low and sustain the economic recovery.

U.S. debt yields rose yesterday after the government’s payrolls report showed employers added more jobs in October than analysts forecast. The 30-year bond yield rose this week to a four-month high as the Fed said it would buy fewer longer-term securities than many investors anticipated. The Treasury will auction $72 billion in notes and bonds next week.

“People’s heads are spinning after this week,” said John Fath, a principal at BTG Pactual in New York. “The market’s affirming what the Fed is trying to accomplish. The market’s saying the Fed will be successful.”

The yield on the 5-year note decreased this week eight basis points, or 0.08 percentage point, to 1.09 percent, according to BGCantor Market Data. The price of the 1.25 percent security maturing in October 2015 rose 3/8, or $3.75 per $1,000 face amount, to 100 25/32.

The 5-year note yield fell to a record low of 1.0148 percent on Nov. 4, a day after the Fed announced additional debt purchases. The 30-year bond yield increased 14 basis points to 4.12 percent after advancing yesterday to 4.16 percent, the highest level since June 22. The extra yield investors demand to hold 30-year bonds compared with 5-year notes rose to a record 3.08 percentage points.

Benchmark Note

The yield on the benchmark 10-year note dropped seven basis points to 2.53 percent in the biggest weekly decrease since the five days ended Oct. 8. The 2-year note yield gained three basis points to 0.37 percent after falling on Nov. 4 to the all-time low of 0.3118 percent.

Fed policy makers said following their Nov. 2-3 meeting that the central bank will expand asset purchases at a pace of about $75 billion a month through June to reduce unemployment and avoid deflation.

Resuming large-scale asset purchases should boost economic growth through lower borrowing costs and higher stock prices, and concern the strategy will lead to significant increases in inflation is “overstated,” Fed Chairman Ben S. Bernanke wrote this week in an opinion piece in the Washington Post.

“You’ve got deflation risks that are going to stay with us for several years,” Dominic Konstam, global head of interest- rates research in New York at Deutsche Bank AG, said yesterday in a Bloomberg Television interview on “Surveillance Midday” with Tom Keene.

Yields on 5-year notes will fall to 0.5 percent and 10-year yields will reach 2 percent, according to Konstam, whose firm is one of the 18 primary dealers that trade with the Fed.

Inflation Outlook

The difference between yields on 30-year bonds and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt known as the break-even rate, was 2.59 percentage points yesterday after rising on Nov. 3 to 2.74 percentage points, the highest level since May 2008.

China, the biggest foreign holder of U.S. debt with $868.4 billion of Treasuries at the end of August, said the Fed needs to explain this week’s decision to purchase bonds to pump money into the economy or risk undermining the global recovery.

“Many countries are worried about the impact of the policy on their economies,” Vice Foreign Minister Cui Tiankai said at a press briefing in Beijing yesterday. “It would be appropriate for someone to step forward and give us an explanation. Otherwise international confidence in the recovery and growth of the global economy might be hurt.”

Government Auctions

The U.S. government will sell $32 billion of three-year notes, $24 billion of 10-year debt and $16 billion of 30-year bonds next week. A $10 billion sale of 10-year TIPS on Nov. 4 drew a record-low yield of 0.409 percent.

The yield on the five-year note increased yesterday for the first time in seven days as the Labor Department reported that employers added 151,000 jobs last month after a revised decrease of 41,000 in September. The median forecast of 83 economists in a Bloomberg News survey was for 60,000 more jobs. The unemployment rate stayed at 9.6 percent.

“With these employment statistics looking a little better, it’s not a good time to be betting on continuous declines in interest rates,” said Anthony Crescenzi, a bond strategist at Newport Beach, California-based Pacific Investment Management Co., in a Bloomberg Radio interview.

Government debt yields will remain lower until there’s more evidence that the U.S. economic recovery is gaining momentum, according to other investors.

“We will need to see much higher numbers of job growth to put any real dent in the employment picture, and we are clearly not there yet,” said Larry Milstein, managing director of government and agency debt trading in New York at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors. “It’s important to note that the Fed is still in the picture.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE