Treasury 30-year bonds surged, pushing the yields below 3 percent for the first time since 2009, after the Federal Reserve said it will purchase longer-term debt and sell shorter maturities to sustain the economic recovery.
The extra yield investors get to hold 30-year securities instead of 10-year debt was 1.14 percentage points, compared with an average of about 0.75 percentage point over the past five years, giving policy makers latitude to drive borrowing costs down. Yields on two-year notes rose after the Fed said it will replace much of its short-term debt in its portfolio.
“This is a stronger policy action than the market was expecting, given their aggressiveness further out the yield curve, and so you are seeing Treasuries rally as a result,” said Gary Pollack, head of fixed-income trading at Deutsche Bank AG’s private wealth management unit in New York.
Yields on 30-year bonds dropped 21 basis points, or 0.21 percentage point, to 3 percent at 4:48 p.m. in New York, according to Bloomberg Bond Trader prices. The 3.75 percent securities due in August 2041 gained 4 12/32, or $43.75 per $1,000 face amount, to 114 26/32. The yields last dropped below 3 percent in January 2009 during the midst of the global financial crisis.
Maturities of five years or less fell, with two-year note yields rising three basis points to 0.19 percent after decreasing yesterday to a record low 0.14 percent. The difference in yield between two- and 30-year debt was 280 basis points, the narrowest on a closing basis since April 2009.
Benchmark 10-year note yields slid eight basis points to 1.86 percent after falling to 1.85 percent, the lowest in Fed figures beginning in 1953.
Thirty-year bonds have returned 26 percent this year, triple the 8.5 percent gain in the broader Treasury market, for the best year since the 2008 financial crisis, according to a Bank of America Merrill Lynch index.
The central bank will buy $400 billion of bonds with maturities of six to 30 years through June while selling an equal amount of debt maturing in three years or less under a program known as Operation Twist.
The Fed will also reinvest maturing mortgage debt into mortgage-backed securities, the Federal Open Market Committee said today in Washington after a two-day meeting. Three officials dissented, the same as at the prior meeting in August.
“The belief is that the Fed is going to be a very large buyer of much of the new production in agency mortgage-backed instruments,” said Tad Rivelle, who oversees about $65 billion as head of fixed-income investments at Los Angeles-based TCW Group Inc.
Yields on Fannie Mae and Freddie Mac mortgage securities that guide home-loan rates tumbled relative to Treasuries after the Federal Reserve said it will reinvest proceeds from past purchases of housing debt into the bonds.
Fannie Mae’s current-coupon 30-year fixed-rate mortgage securities fell about 0.15 percentage point to 1.07 percentage point more than 10-year U.S. government debt, the largest drop since March 2009, according to data compiled by Bloomberg.
About 32 percent of the purchases will be in Treasuries maturing from six to eight-years, 32 percent will be in debt due in eight to 10 years, 4 percent will be in securities maturing in 10 to 20 years, 29 percent will be in bonds due in 20 to 30 years and 3 percent will be in Treasury Inflation Protected Securities maturing in six to 30 years, according to a statement from the New York Fed.
“The Fed’s firing another bullet should continue to bring rates down further,” said Andy Richman, who oversees $10 billion as a strategist in Palm Beach, Florida, at SunTrust Banks Inc.’s private wealth management division. “It’s not a silver bullet, but it should help over the longer term.”
Policy makers were projected to replace short-term U.S. debt in its $1.65 trillion portfolio with longer-term securities by 71 percent of 42 economists in a Bloomberg survey. 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.”
Treasuries rose before the Fed’s decision after Moody’s Investors Service cut the long-term credit ratings of Bank of America Corp. and Wells Fargo & Co.
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.
Operation Twist is among a few untested policy tools that Fed Chairman Ben S. Bernanke has said the Fed may use as risks to the U.S. recovery rise and unprecedented easing falls short of fulfilling the central bank’s mandate for full employment.
The Fed bought $600 billion of Treasuries through June under the second round of quantitative easing, following the $1.7 trillion first round of purchases that ended in March 2010.
“QE2 didn’t seem to do a lot for the economy,” said Brian Edmonds, head of interest rates in New York at Cantor Fitzgerald LP, one of 20 primary dealers that trade with the Fed, before the central bank’s statement.
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 rose on Aug. 9, when the Fed pledged for the first time to keep its target rate for overnight lending between banks at a record low at least through mid-2013 to revive a recovery that’s “considerably slower” than anticipated. The yield on 10-year notes fell to what was a record low.
The central bank’s decision came after Standard & Poor’s unprecedented cut of America’s credit rating on Aug. 5 to AA+ from AAA. Fitch Ratings and Moody’s Investors Service affirmed their top grades for U.S. debt.
Treasuries have rallied this year on speculation Europe’s sovereign-debt crisis is worsening and concern the U.S. economic recovery is stalling.
The International Monetary Fund lowered its global growth forecast, citing European turmoil and the potential for an American fiscal impasse.
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 from 2.5 percent.