U.S. 30-Year Bond Yields Tumble Most Over Two Days Since 2008

Treasury Yield Declines to Record on Fed Bond-Purchase Twist
The Fed said yesterday it will replace $400 billion of short-term debt in its portfolio with longer-term Treasuries. Photographer: Andrew Harrer/Bloomberg

Treasury 30-year bonds rallied, pushing yields down the most over two days since the depths of the financial crisis almost three years ago, as stocks fell worldwide on concern the economy is sliding into recession.

Benchmark 10-year notes rose for a fifth day in the longest stretch of advances since May a day after the central bank said it would buy $400 billion of longer-term debt while selling an equal amount of shorter maturities to cap borrowing costs under what is known as Operation Twist. The extra yield 30-year bonds offer over two-year notes shrank to the narrowest since 2009.

“People are really scared,” said Justin Lederer, an interest-rate strategist in New York at Cantor Fitzgerald LP, one of the 20 primary dealers that trade with the Fed. “The market expected a curve twist, but not to this extent, and so we are seeing a strong long-end rally in bonds. And we are in the midst of a situation where every day the likelihood of a global recession creeps up stronger.”

Yields on 30-year bonds decreased 20 basis points, or 0.20 percentage point, to 2.80 percent at 5:11 p.m. in New York, according to Bloomberg Bond Trader prices. The 3.75 percent securities due in August 2041 advanced 4 11/32, or $43.44 per $1,000 face amount, to 119 6/32. Yields fell as much as 44 basis points over two days, the most since November 2008.

Two-Year Yields

Two-year note yields were little changed at 0.20 percent after dropping this week to a record low 0.14 percent. The difference between 30- and two-year yields was 2.59 percentage points, the lowest on a closing basis since February 2009.

A gain of more than one point in 10-year notes pushed yields down 14 basis points to 1.72 percent after touching 1.6961 percent, the lowest in Fed figures beginning in 1953.

Yields on 10-year notes may drop to 1.60 percent by the end of the year, Carl Lantz, head of interest-rate strategy at the primary dealer Credit Suisse Group AG, said today in a research note. The previous forecast was 1.75 percent. The 30-year bond yield may drop to 2.50 percent, compared with a previous projection of 3.30 percent.

The difference in yield between 10-year Treasuries and inflation-indexed debt, a measure of the outlook for consumer prices known as the break-even rate, dropped to 1.71 percentage points, the lowest on a closing basis since September 2010.

At today’s $11 billion government auction of 10-year Treasury Inflation Protected Securities, the debt produced a yield of 0.078 percent. The average forecast in a Bloomberg News survey of five primary dealers was 0.048 percent. Investors bid for 2.61 times the amount of debt offered, compared with an average of 2.84 for the past 10 auctions of the securities.

Indirect Bidders

Indirect bidders, a class of investors that includes foreign central banks, purchased 30.4 percent of the offering, compared with 41.6 percent at the July auction and the 10-sale average of 42.4 percent.

Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 35.7 percent, the highest in data beginning in 2003.

“The auction was OK,” said Michael Pond, co-head of interest-rate strategy in New York at Barclays Plc, which as a primary dealer is obliged to participate in U.S. debt offerings. “We are in the midst of a risk-off trade, and break-evens are considered risk assets. There was a pretty significant direct bid, showing there is demand for inflation protection.”

The U.S. government will auction $35 billion of two-year notes, the same amount of five-year debt and $29 billion of seven-year securities in separate offerings beginning Sept. 27.

Returns on Bonds

Thirty-year bonds have returned 30 percent this year, more than triple the 8.9 percent gain in the broader Treasury market, according to a Bank of America Merrill Lynch index. The gain in long bonds is the biggest since a 41 percent increase for 2008.

After a two-day policy meeting that ended yesterday, the Federal Open Market Committee cited “significant downside risks” in the U.S. economy and announced it will buy bonds due in six to 30 years through June while selling an equal amount of debt maturing in three years or less.

The purchases “should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative,” the Fed said in its statement.

The central bank also announced a measure to support the mortgage market by reinvesting maturing housing debt into mortgage-backed securities instead of U.S. government debt.

‘Shock and Awe’

“The Fed gave us a surprise -- a shock and awe,” said David Ader, head of government bond strategy in Stamford, Connecticut, at CRT Capital Group LLC. “They will be buying 90 percent of the 30-year sector for the next nine months, so that’s more than anyone anticipated. It gave us the drama of these last two days.”

U.S. debt securities got a boost as stocks slumped worldwide. The Standard & Poor’s 500 Index decreased 3.2 percent, and the Stoxx Europe 600 Index slid 4.6 percent.

IntercontinentalExchange Inc.’s Dollar Index, gauging the greenback against the currencies of major U.S. trading partners, rose to the highest level since February as investors took refuge in the safest assets.

“Markets are once again looking forward and not liking what they see,” John Briggs, a U.S. government bond strategist at RBS Securities Inc. in Stamford, wrote in a research note to clients. “Twist has arrived. Low for even longer is only reinforced by the Fed decision, and we see no reason to change our mantra.” The unit of Royal Bank of Scotland Group Plc is a primary dealer.

The world is on the eve of the next financial crisis with sovereign debt its epicenter, according to Mohamed El-Erian, chief executive officer and co-chief investment officer at Pacific Investment Management Co., which manages the world’s largest bond fund.

The European Central Bank hasn’t put in place a “circuit breaker” to contain the region’s turmoil, El-Erian said at an event in Washington today. Responses of policy makers to the crisis haven’t been structural, he said, adding that the U.S. and Europe have not addressed impediments to economic growth.