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Treasuries Decline on Speculation of Bernanke to Signal Stimulus

U.S. Federal Reserve Chairman Ben S. Bernanke
U.S. Federal Reserve chairman Ben S. Bernanke. Photographer: Brendan Smialowski/Bloomberg

Treasuries fell amid speculation Federal Reserve Chairman Ben S. Bernanke will signal additional measures to stimulate the economy, damping demand for the safest assets.

Treasury two-year note yields touched the highest in two weeks amid concern yields that dropped to record lows this month will erode demand when the U.S. sells $99 billion of debt this week. Bernanke is scheduled to speak Aug. 26 in Jackson Hole, Wyoming at an annual conference sponsored by the Fed Bank of Kansas City. Stocks pared earlier gains.

“The market is floundering lower around Treasury supply and Bernanke coming,” said Sean Murphy, a trader at Societe Generale SA in New York, one of the 20 primary dealers that trade with the Fed. “The jury is still out on if we are going to get more from Bernanke or not, so the market is in a wait-and-see mode.”

Ten-year yields rose four basis points to 2.11 percent at 5:02 p.m. in New York, according to Bloomberg Bond Trader prices. The 2.125 percent note due August 2021 fell 12/32, or $3.75 per $1,000 face amount, to 100 5/32. The record low yield of 1.97 percent was set Aug. 18.

Two-year note yields rose one basis point to 0.20 percent, touching the most since Aug. 8. The Standard & Poor’s 500 Index closed little changed after gaining as much as 2 percent.

Debt Returns

Treasury bills swung to negative rates, with one-month and three-month bills at -0.005 percent, compared with 0 percent on Aug. 19. Three-month bill rates touched 0.09 percent on July 29.

Treasuries have returned 7.7 percent this year compared with 5.9 percent for all of 2010, according to Bank of America Merrill Lynch indexes.

The U.S. government plans to auction $35 billion of two-year notes tomorrow, the same amount of five-year debt on Aug. 24 and $29 billion of seven-year securities on Aug. 25.

The decline in yields is curbing demand, Ward McCarthy, the chief financial economist at Jefferies, and Thomas Simons, a money market economist at the company, wrote in a report dated Aug. 19.

“There was good selling from real money accounts when the 10-year rate briefly slipped below 2” percent last week, the two New York-based economists wrote. “The Treasury market is vulnerable to a correction.”

Rates on U.S. Treasuries show traders are betting Bernanke will indicate as soon as this week that the Fed will begin a third round of so-called quantitative easing to boost the economy, a scenario the world’s biggest bond dealers said is unlikely.

Fed Watch

Barclays Plc said 10-year yields indicate traders have priced in $500 billion to $600 billion of Treasury purchases by the Fed. Citigroup Inc. said current rates can only be justified by more central bank-bond buying or assuming the economy will shrink by 2 percent.

“The market is pricing in another round of large-scale asset purchases, looking for confirmation possibly as early as the Jackson Hole symposium” in Wyoming this week, Anshul Pradhan, a fixed-income research analyst at Barclays in New York, said in an interview last week. “The probability of that is low. If the chairman does disappoint, then there should be a reversal in the outperformance of 10-year notes.”

Central bankers from around the world will meet in Jackson Hole at an annual conference sponsored by the Fed Bank of Kansas City. Bernanke triggered financial rallies a year ago when he said at the same gathering that the Fed was prepared to “do all that it can” to ensure economic recovery and suggested it would purchase more securities if growth slowed.

‘Operation Twist’

The Fed may sell shorter-term maturity securities held in its portfolio and buy longer-duration bonds, known as operation twist, to help stimulate the economy, Ira Jersey, an interest-rate strategist in New York at Credit Suisse Group AG, said today in an interview on “Surveillance Midday” with Tom Keene. Credit Suisse says the U.S. has about a 30 percent chance of tipping into recession.

“We suspect that the economic data is going to continue to be weak,” Jersey said. “We’re going to have a persistently weak economy for a while and we think in that environment the Fed will be buying the 10 year and doing the so-called operation twist.”

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, was 2.04 percentage points. The spread narrowed to 1.96 percentage points on Aug. 18, the least since October. The five-year average is 1.69 percentage points.

Economic Data

“The financial markets are whipping themselves up for a fear of a double-dip” recession, said Roger Bridges, who oversees the equivalent of $15.6 billion of debt as the Sydney-based head of bonds at Tyndall Investment Management Ltd., a unit of Japan’s Nikko Asset Management Co. “Treasuries are very expensive. So long as this fear keeps on going, they will continue” to be so.

Goldman Sachs Group Inc. lowered its forecast for U.S. economic growth in 2011 on signs the recovery in the world’s largest economy lost momentum.

The U.S. economy will expand 1.5 percent this year, down from a previous forecast of 1.7 percent, Goldman economists in New York including Jan Hatzius said in a note published on Aug. 19. Credit Suisse and Citigroup were among banks lowering growth forecasts this month.

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