Treasury 10-year note yields touched a record low on speculation the Federal Reserve will announce plans to buy longer-maturity debt under what is known as Operation Twist to support the economy.
The extra yield Treasury investors get to hold 30-year bonds instead of two-year notes was the lowest in more than a year before today’s conclusion of the Federal Open Market Committee’s two-day meeting. Moody’s Investors Service cut the long-term credit ratings of Bank of America Corp. and Wells Fargo & Co., renewing concern the banking system is weakening.
“Moody’s decision to cut the Bank of America credit rating pushed Treasury yields lower and weighed on the equity market ahead of this afternoon’s FOMC announcement,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “The market is susceptible to this type of headline risk.”
Yields on 10-year notes dropped two basis points, or 0.02 percentage point, to 1.92 percent at 1:37 p.m. in New York, according to Bloomberg Bond Trader prices. The 2.125 percent securities due in August 2021 increased 5/32, or $1.56 per $1,000 face amount, to 101 26/32. Yields fell as low as 1.8765 percent, the lowest in Fed figures going back to 1953.
The 30-year yields were little changed at 3.21 percent after touching 3.1561 percent, the lowest since January 2009. Two-year yields were little changed at 0.15 percent after falling yesterday to a record low 0.1431 percent. The difference in yield between two- and 30-year debt was 302 basis points, the narrowest on a closing basis since August 2010.
Bank Ratings Cut
Moody’s cut Bank of America’s ratings to Baa1 from A2 for long-term senior debt, with the outlook remaining negative. Wells Fargo’s ratings were lowered to A2 from A1 by the ratings company, with the outlook staying negative. Citigroup Inc. had it short-term credit ratings cut to Prime 2 from Prime 1.
“The banking downgrades did provide a bit of a bid in Treasuries as investors liquidate stocks,” said Sean Murphy, a trader in New York at Societe Generale, one of the 20 primary dealers that trade with the Fed.
The central bank will decide today to replace short-term Treasuries in its $1.65 trillion portfolio with longer maturities, according to 71 percent of 42 economists surveyed by Bloomberg News.
The program will probably fail to reduce the 9.1 percent jobless rate, said 61 percent of the economists. Among those, 15 percent predict it will be “somewhat harmful.”
U.S. 10-year notes will rally after the Fed announces a $360 billion program under which it sells $60 billion of one- to three-year Treasuries and buys the same amount of seven- to 10-year U.S. debt each month for six months, Credit Suisse Group AG strategists including Carl Lantz in New York said yesterday in a research report.
More purchases may push 10-year note yields down as much as 35 basis points, James Caron, global head of interest-rate strategy in New York at the primary dealer Morgan Stanley, wrote in a report yesterday.
“Operation Twist appears well-priced into the market,” John Briggs, a U.S. government bond strategist in Stamford, Connecticut, at the primary dealer RBS Securities Inc., wrote in a research note to clients. “The underlying global fundamentals that took Treasuries to these yield levels have not changed, however, so any moves to higher yields should be bought.”
Economists at the primary dealers Goldman Sachs Group Inc. and JPMorgan Chase & Co. have said policy makers may also choose to reduce the 0.25 percent interest rate paid on the excess reserves that banks hold at the Fed. Policy makers are due to issue their statement at about 2:15 p.m. in Washington.
Operation Twist gets its name from a policy conducted by the Fed in cooperation with the Treasury Department in 1961, when the central bank bought long-term securities as the government concentrated its issuance in shorter-maturity debt.
While Fed staff called it Operation Nudge, it became known as Operation Twist, after Chubby Checker’s hit The Twist, according to a report published March 14 by Eric Swanson, an economist at the San Francisco Fed. The move lowered long-term Treasury yields by about 15 basis points, according to Swanson.
Treasuries have returned 8.5 percent in 2011, heading for their best year since the depths of the financial crisis in 2008, according to Bank of America Merrill Lynch indexes.
The International Monetary Fund cut its forecast for global growth and predicted repercussions if Europe fails to contain its debt crisis or U.S. politicians become deadlocked over fiscal plans.
The world economy will expand 4 percent this year and next, the IMF said yesterday, compared with June forecasts of 4.3 percent in 2011 and 4.5 percent in 2012. The U.S. growth projection for 2011 was lowered to 1.5 percent this year from 2.5 percent.
Greek Prime Minister George Papandreou is pressing for accelerated budget cuts to ensure the next tranche of an international rescue package is delivered next month to stave off default. U.S. President Barack Obama is asking Congress to approve a $447 billion job-creation plan.
Republican lawmakers urged Fed Chairman Ben S. Bernanke to refrain from additional monetary easing in a letter signed by Senate Minority Leader Mitch McConnell, House Speaker John Boehner, Senator Jon Kyl and House Majority Leader Eric Cantor.
“We have serious concerns that further intervention by the Federal Reserve could exacerbate current problems or further harm the U.S. economy,” they wrote in the Sept. 19 letter.
Senator Charles Schumer, a Democrat from New York, in a letter yesterday called the note “a heavy-handed attempt to meddle in the Fed’s independent stewardship of monetary policy” and said it should be “ignored by Chairman Bernanke and the Fed’s policy makers.”