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Treasuries Advance as Bernanke May Point to Stimulus

Updated on

Treasuries fell as Federal Reserve Chairman Ben S. Bernanke’s congressional testimony damped speculation the central bank will expand its economic stimulus through additional debt purchases, known as quantitative easing.

U.S. debt headed for the first monthly decline since October as the European Central Bank awarded 800 euro-region banks three-year loans totaling 529.5 billion euros ($712.2 billion). U.S. 30-year bonds rose earlier as the Fed purchased $1.8 billion in longer-term securities as part of a policy known as Operation Twist.

“It’s more about what Bernanke did not say,” said Thomas Simons, a government debt economist in New York at Jefferies Group Inc., one of 21 primary dealers that trades with the Fed. “There was an expectation that Bernanke would speak more explicitly about a potential QE3.”

The 10-year note yield rose three basis points, or 0.03 percentage point, to 1.97 percent at 5:02 p.m. New York time, according to Bloomberg Bond Trader prices. The 2 percent security due February 2022 fell 1/4, or $2.50 per $1,000 face amount, to 100 1/4. The yield fell to as low as 1.91 percent and has climbed from 1.8 percent at the end of January.

U.S. 30-year bond yields rose one basis point to 3.09 percent.

Futures Trades

The June 2012 10-year note futures contract tumbled from about 131 11/32 to the day’s low of 130 23/32 in the five or so minute after Bernanke’s comments were released. That corresponds to a drop of $625 per each $100,000 contract.

“There was definitely a huge seller of 10-year futures,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “You can see the trades going through. They were real trades. The block trades occurred because of what Bernanke didn’t say.”

Trading volume in 10-year note futures totaled 1.356 million contracts on the as of 2 p.m. Chicago time, compared with average daily volume this year of 1.125 million contracts, according to CME Group Inc.

CME Group, the world’s largest futures exchange, said there is no indication of erroneous trading in 10-year Treasury futures contracts after Bernanke spoke.

“There were no issues that were reported,” said Michael Shore, a spokesman for the Chicago-based futures exchange owner. “We have not called any trades into question and have no reports of error trades.”

Market Positions

The percent of “net longs” among U.S. Treasuries investors rose to 13 percent in the week ending Feb. 27, from two percent the previous week, a JPMorgan Chase & Co. survey showed yesterday. A long is a bet the price of a security will rise.

“The market is quite long, so it’s not too surprising that it’s trading off,” said James Combias, New York-based head of Treasury trading at primary dealer Mizuho Securities USA Inc.

The difference between the yield on the 10-year note and the yield on the two-year note, the so-called yield curve, widened today to 1.68 percentage points. The average for the past year is 2.15 percentage points.

Bank of America Merrill Lynch’s MOVE index, which measures price swings based on options, closed yesterday at 73.9 basis points, near the lowest level since July 2007. The five-year average is 112 basis points.

Fed Rates

The central bank has kept interest rates close to zero since December 2008 and expanded its balance sheet by buying $2.3 trillion of assets in two rounds of bond purchases. The Fed announced the most recent stimulus program on Sept. 21.

The central bank purchased securities maturing from February 2036 to August 2041 today, according to the Fed Bank of New York’s website. The Fed is replacing $400 billion of shorter-maturity Treasuries in its holdings with longer-term debt to cap long-term borrowing costs under the program it plans to conclude in June.

Bernanke also said inflation is likely to “remain subdued” as the Fed continues to monitor energy markets. Gasoline prices have climbed 13 percent since the start of the year to $3.72 a gallon, according to the American Automobile Association.

“Our big takeaway from Bernanke is that he reiterated the message from the January Federal Open Market Committee statement,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “The data will steer the Fed’s monetary policy.”

Inflation Target

Bernanke said the FOMC’s announcement of a 2 percent inflation target in January was aimed at providing “additional transparency” and did “not imply a change in how the committee conducts policy.”

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices during the life of the debt, widened 17 basis points to 2.27 percentage points. The 10-year average is 2.14 percentage points.

In January, the Fed lowered its projected range for growth this year to 2.2 percent to 2.7 percent, down from 2.5 percent to 2.9 percent in November. The range for next year now is 2.8 percent to 3.2 percent, down from a previous forecast of 3 percent to 3.5 percent.

The U.S. economy expanded at a “modest to moderate pace” in January and early February, fueled by manufacturers, including automakers, the Fed said today in its Beige Book business survey, published two weeks before the FOMC meets to set monetary policy.

Plosser Speaks

Fed Bank of Philadelphia President Charles Plosser said his appropriate path of monetary policy calls for the U.S. central bank to raise its benchmark interest rate by the end of this year.

“I’m more optimistic now than I was in August,” as “the economy’s done pretty well,” Plosser said in response to questions from reporters after a speech in New York. The drop in the unemployment rate over the past year is “really significant,” he said.

U.S. gross domestic product climbed at a revised 3 percent annual rate during the fourth quarter, the most since the second quarter of 2010, Commerce Department figures showed today in Washington. Economists surveyed by Bloomberg News called for no change from the previously reported 2.8 percent gain.

The number of financial institutions flocking to the European Central Bank’s three-year loans soared to 800 and borrowing rose to a record in an operation that may boost the euro-area economy.

European Finance

Bond and equity markets have rallied since the ECB’s first three-year loan, suggesting banks are investing at least some of the money in higher yielding assets. That’s helped ease concern about a credit crunch and won governments time to agree on measures to contain the sovereign debt crisis. The risk is that banks become too reliant on ECB money and fail to take the steps needed to strengthen their balance sheets.

China, the largest U.S. creditor, held $1.15 trillion in U.S. Treasuries in December, revised figures issued by the Treasury Department show.

Japan maintained its place as America’s second-largest lender, with $1.06 trillion of Treasuries in December, while Brazil held $226.9 billion, the Treasury Department said.

Treasuries have posted a loss of 0.1 percent this year, compared with a return of 9.8 percent last year, the most since 2008, according to Bank of America Merrill Lynch data.

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