Treasuries rose as Federal Reserve Chairman Ben S. Bernanke refrained from endorsing the use of additional stimulus measures while a government report showed economic growth slowed more than forecast last quarter.
The yield on the 10-year note declined as Bernanke said the central bank still has tools to stimulate the economy without providing details or signaling when or whether policy makers might deploy them during his speech at a conference in Jackson Hole, Wyoming. Treasuries rose earlier as a report showed gross domestic product grew less than previously estimated, capping the weakest six months of the economic recovery. Repurchase agreement traders sought to extend maturities due to possible trading disruptions from Hurricane Irene.
“We’re reacting to what’s not in the speech,” said Kevin Flanagan, a Purchase, New York-based chief fixed-income strategist for Morgan Stanley Smith Barney. “He took the least controversial option and that’s to reiterate the outcome of the August Federal Open Market Committee meeting.”
Yields on 10-year notes dropped four basis points to 2.19 percent at 3:08 p.m. in New York, according to Bloomberg Bond Trader prices. The 2.125 percent securities maturing in August 2021 gained 11/32, or $3.44 per $1,000 face amount, to 99 13/32. Yields fell as much as 11 basis points.
Thirty-year bonds gained as much as two points, pushing yields down 11 basis points to 3.49 percent.
Rates for borrowing and lending securities in the repurchase-agreement market rose and investors sought to extend maturities on concern east coast power outages and closings of mass transit will keep traders home the hurricane strikes.
Overnight general collateral Treasury repurchase, or repo, rates, opened at 0.10 percent and traded at 0.13 percent, according to data from ICAP Plc, the world’s largest inter-dealer broker.
“A market that’s already thin because of one of the peak vacation season week is even thinner because of the hurricane,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors.
He said some investors were closing out short positions, or bets on declines in Treasuries, before the weekend. “There may be some of that going into the weekend, but all it takes is a couple of traders to do trades and move the market,” Coard said.
Treasuries pared gains after reaching the highs of the day as investors took assurance from Bernanke that growth will resume.
“From his assessment, things aren’t as bad as a lot of market participants had thought,” said William Larkin, a fixed-income money manager at Salem, Massachusetts-based Cabot Money Management, which oversees $500 million. “It means the demand for the risk free trade will decline.”
U.S. stocks gained after earlier losses as investors were optimistic on Bernanke’s forecast for growth. The Standard & Poor’s 500 Index rose 1.1 percent after dropping 1.4 percent.
“In addition to refining our forward guidance, the Federal Reserve has a range of tools that could be used to provide additional monetary stimulus,” Bernanke said in the speech. He said a second day has been added to the next policy meeting in September to “allow a fuller discussion” of the economy and the Fed’s possible response.
Bernanke, a former Princeton University economist, repeated his call for Congress to adopt a “credible plan for reducing future deficits over the longer term” without harming U.S. growth in the near term.
Standard & Poor’s downgraded the U.S. to AA+ from AAA on Aug. 5, saying the U.S. government is becoming “less stable, less effective and less predictable.” Treasury yields have dropped to record lows since the downgrade.
The 10-year note yield fell on Aug. 18 to the historical low of 1.97 percent, while the yield on the five-year note fell that day to a record of 0.79 percent. Two-year note yields reached a record low of 0.1568 percent on Aug. 9.
While Bernanke sought to reassure investors and the public that U.S. growth is safe in the long run and that the Fed still has tools to aid the recovery if needed, he stopped short of indicating that the central bank will move ahead with a third round of government bond-buying.
Inflation has climbed and the U.S. unemployment rate stood at 9.1 percent in July, close to the highest this year as economic growth slowed.
Commerce Department figures today showed the economy grew at a 1 percent annual pace in the second quarter. The figure is down from the 1.3 percent the government estimated last month. The median forecast in a Bloomberg News survey was for a 1.1 percent annual pace. GDP grew by 0.4 percent in the first quarter.
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, widened to 2.07 percentage points yesterday from 2.01 percentage points a week ago. The average for the past decade is 2.11 points.
On Aug. 24, 2010, a few days before Bernanke’s Jackson Hole appearance, inflation expectations had fallen to 1.5 percent, the lowest level in the last two years. The central bank aims for overall inflation between 1.7 percent and 2 percent.
Fed officials on Aug. 9 pledged to keep benchmark interest rates at all-time lows through mid-2013 in a bid to revive economic growth, sending yields on two- and 10-year notes to then record lows.
The FOMC at its meeting earlier this month discussed a range of policy tools to bolster the economy and said it’s “prepared to employ these tools as appropriate,” it said in a statement Aug. 9 in Washington.
Fed Bank of Kansas City President Thomas Hoenig yesterday said there’s a limit to how much more the central bank can help the U.S. economy and that the focus should now be on solving the country’s fiscal problems.
“We can’t do it all,” Hoenig, the central bank’s longest-serving policy maker, said in an interview with Bloomberg Television. “We have a problem in this country with debt” and “if we don’t turn to the long run, we will be dealing with overnight crises for as far as the eye can see.”
Dallas Fed President Richard Fisher joined Charles Plosser of Philadelphia and Narayana Kocherlakota from Minneapolis as part of the three regional bank presidents in dissenting at the Fed’s most recent meeting this month, posing the most opposition on the FOMC in almost 19 years. All three preferred to maintain a commitment to keep rates low for an unspecified “extended period.”
Bernanke used his Jackson Hole speech last year to announce the Fed would “do all that it can” to spur the economic recovery. He went on to implement a $600 billion debt-purchase plan in November.
A plunge in world stock markets in August coupled with concern the pace of U.S. growth was slowing led to speculation earlier in the month that the Fed chief would use today’s speech to announce another round of bond buying.
Bernanke said in testimony to Congress last month that “the possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might reemerge, implying a need for additional policy support.”
U.S. government securities have returned 2.7 percent in August in their best monthly performance since the depths of the financial crisis in December 2008, according to a Bank of America Merrill Lynch index. Investors sought the security of debt while stocks tumbled, sending the MSCI All Country World Index of shares down 12 percent.