Treasuries Gain on Speculation Bernanke May Boost Debt Buying

Treasuries rose, pushing two-year note yields to the lowest level in three weeks, on speculation the Federal Reserve may boost its program of bond buying to support the economic recovery.

Benchmark 10-year notes gained for the first time in four days after Fed Chairman Ben S. Bernanke said yesterday the central bank may increase purchases of government debt beyond the $600 billion announced last month and that unemployment may take five years to fall to a “more normal” level of 5 to 6 percent. The central bank bought $2.044 billion of Treasuries maturing from August 2028 to November 2040 today.

“Bernanke’s comments showed the Fed is on a course of not deterring at all from purchases and possibly extending them, which has allowed the market to catch a bid,” said Paul Horrmann, a broker in New York at Tradition Asiel Securities Inc., an interdealer broker. “The Fed buybacks supported the move higher.”

The 10-year note yield fell eight basis points, or 0.08 percentage point, to 2.93 percent at 5:07 p.m. in New York, according to BGCantor Market Data. The price of the 2.625 percent security maturing in November 2020 increased 21/32, or $6.56 per $1,000 face amount, to 97 12/32.

The two-year note yield decreased five basis points today to 0.43 percent after touching 0.42 percent, the lowest level since Nov. 10. The yield on the 10-year note climbed on Dec. 3 to 3.04 percent, the highest level since July 28.

Bernanke’s View

The purchase of more government bonds than planned is “certainly possible,” Bernanke said in an interview broadcast yesterday on CBS Corp.’s “60 Minutes” program. “It depends on the efficacy of the program” and the outlook for inflation and the economy, Bernanke said.

U.S. employers added 39,000 workers in November, Labor Department figures showed Dec. 3. That was less than the most pessimistic forecast of economists in a Bloomberg News survey. The jobless rate rose to 9.8 percent from 9.6 percent.

“At the rate we’re going, it could be four, five years before we are back to a more normal unemployment rate” of about 5 percent to 6 percent, Bernanke said.

Bernanke said a return to a recession “doesn’t seem likely” because sectors of the economy such as housing can’t become much more depressed. A long period of high unemployment may still damage confidence and is “the primary source of risk that we might have another slowdown in the economy,” he said.

‘Taken Comfort’

“The market has taken comfort from Bernanke’s comments that he would extend Treasury purchases if he has to,” said Donald Ellenberger, who oversees about $6 billion as co-head of government and mortgage-backed securities at Federated Investors Inc. in Pittsburgh. “We’ve had a hard time getting through the 3 percent level on the 10-year note and will need better economic data to do so.”

Richmond Fed President Jeffrey Lacker said in a Charlotte, North Carolina, speech today that the purchases of Treasuries risk spurring inflation in a few years and may make it harder for the Fed to withdraw the stimulus eventually.

A further gain in Treasuries may be tempered before the government sells $66 billion of notes and bonds this week. The U.S. will auction $32 billion of three-year securities tomorrow, $21 billion of 10-year debt on the following day and $13 billion of 30-year bonds on Dec. 9.

Yields on 10-year bunds are poised to rise above comparable-maturity U.S. Treasuries for the first time since June 2009 on concern Germany will assume a greater burden to support the European Monetary Union.

Spread With Germany

The difference narrowed to as little as 7 basis points on Nov. 29, from 90 basis points in April, as the 85 billion euro ($113 billion) aid package for Ireland failed to stem concern that Europe’s debt crisis will broaden. The spread was 11 basis points today.

Yields on Treasuries will increase during the second half of 2011 as better U.S. economic data and renewed focus on the budget deficit will overcome uncertainty emanating out of Europe, according to Barclays Plc.

The 10-year note yield will reach 3.5 percent by the end of 2011, higher than the firm’s previous forecast of 3.2 percent, a Dec. 3 research report from Barclays said.

“The economy is doing a little better than people expected, and the short-term policy boost of the extension of tax cuts and unemployment benefits come at the expense of the deficit situation, both of which point to rates headed higher,” said Ajay Rajadhyaksha, head of U.S. fixed-income strategy at Barclays in New York.

The yield on the 10-year note will end 2011 at 3.23 percent, according to the average forecast in a Bloomberg News survey of banks and securities companies, with the most recent estimates given the heaviest weightings.

Treasuries have handed investors a 6.9 percent return this year, according to Bank of America Merrill Lynch data. German debt has gained 6.4 percent, the indexes show.

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