Treasury notes snapped a three-day losing streak after Federal Reserve Chairman Ben S. Bernanke said the economy is at risk from Europe’s debt crisis, while refraining from discussing steps the central bank might take to protect growth.
Treasuries fluctuated earlier, with U.S. 10-year yields touching the highest in a week after China cut interest rates for the first time since 2008, stepping up efforts to combat a deepening economic slowdown. The benchmark note yields may fall to a record 1.3 percent if the European crisis escalates, according to JPMorgan Chase & Co.
“The market is pushing the Fed to be responsive, but Bernanke isn’t at the stage where he’s ready to pull the trigger,” said Aaron Kohli, an interest-rate strategist at BNP Paribas SA in New York, one of 21 primary dealers that trade with the central bank. “The Treasury market has settled in around these levels, and is waiting for the data to worsen, or for something on the policy front to improve, as is the Fed.”
The 10-year note yield fell two basis points, or 0.02 percentage point, to 1.64 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. It rose two basis points earlier to 1.68 percent, the highest level since May 30, and dropped as much as four basis points. The 1.75 percent security maturing in May 2022 gained 6/32, or $1.88 per $1,000 face amount, to 101.
Thirty-year bond yields were little changed at 2.74 percent after rising four basis points and losing five basis points.
Trading volume declined. About $297 billion of Treasuries changed hands through ICAP Plc, the world’s largest interdealer broker, compared with $341 billion yesterday. The average volume over the past year was $257 billion
Ten- and 30-year yields reached record lows of 1.4387 percent and 2.5089 percent on June 1 after the Labor Department reported the economy added 69,000 jobs in May, less than half the forecast in a Bloomberg survey, and as concern festered the European crisis might spread. The yields reached 2012 highs in March, 3.49 percent for long bonds and 2.4 percent for 10-years.
Treasuries have returned 1.7 percent this year, according to a Bank of America Merrill Lynch index.
“The situation in Europe poses significant risks to the U.S. financial system and economy and must be monitored closely,” Bernanke said today in testimony to Congress’s Joint Economic Committee in Washington. “As always, the Federal Reserve remains prepared to take action as needed.”
The 58-year-old Fed chairman didn’t call for consideration of additional stimulus. Policy makers have options for further easing, he said, while declining to specify them.
The central bank will decide on “what action is appropriate or what communications are appropriate” if it first decides economic growth isn’t strong enough to cut unemployment, Bernanke said in response to a question.
In contrast, Vice Chairman Janet Yellen said yesterday the economy “remains vulnerable to setbacks” and may warrant more accommodation.
The Federal Open Market Committee opens a two-day policy meeting on June 19. The central bank has held its benchmark interest rate at zero to 0.25 percent since December 2008, and bought $2.3 trillion of bonds in two rounds of quantitative easing from 2008 through 2011 to spur growth.
“The preemptive aspect of Fed policy is the casualty, and that means risk assets have to do even worse for the Fed to come in,” said Dominic Konstam, global head of interest rates research in New York at the primary dealer Deutsche Bank AG. “There were a lot of people who thought Bernanke would be definitive on additional stimulus measures. The speech was a little tame in that context.”
The Fed sold $8.4 billion today of Treasuries due from December 2013 to February 2014 as part of its Operation Twist program. The central bank is replacing $400 billion of shorter-term Treasuries in its holdings with longer maturities by the end of this month to keeping borrowing costs down.
Yields indicate investors expect inflation to hold in check in the U.S., providing Bernanke the room for further stimulus.
The difference in yields between 10-year notes and Treasury Inflation Protected Securities, which represents traders’ expectations for inflation over the life of the debt, was 2.14 percentage points today, down from this year’s high of 2.45 percentage points in March. The average over the past decade is 2.15 percentage points.
Valuation measures showed Treasuries are at almost the most expensive level ever. The term premium, a model created by economists at the Fed, was at negative 0.83 percent after closing on June 1 at negative 0.94 percent, the record. The average over the past year is negative 0.44. A negative reading indicates investors are willing to accept yields below what’s considered fair value.
The yield difference between 10- and 30-year Treasuries widened to 110 basis points, from 108 yesterday. It reached 122 basis points on Feb. 3, the widest this year.
Spain’s credit grade was lowered by Fitch Ratings to BBB, from A. The firm said the country, the euro bloc’s fourth-largest economy, will stay in recession through the remainder of this year and 2013. Spanish borrowing costs climbed earlier above 6 percent at a 10-year bond sale amid concern Europe’s leaders are failing to contain the region’s debt crisis.
Treasury “10-year notes have been very highly correlated with the yield spreads of Spain, Italy and France,” Terry Belton, the JPMorgan’s global head of fixed-income and foreign-exchange research, said in a radio interview on Bloomberg Surveillance with Tom Keene and Ken Prewitt. If those markets stay “under stress, it’s easy for 10-year notes to go as low as 1.4 percent or even 1.3 percent.”
The Treasury said it will auction $66 billion in notes and bonds next week: $32 billion of three-year debt, $21 billion of 10-year securities and $13 billion of the 30-year bonds.
U.S. government securities were little changed earlier today as data showed fewer Americans applied for unemployment insurance payments last week, indicating limited progress in the labor market after a two-month slowdown in hiring.
First-time claims for jobless benefits fell by 12,000 to 377,000 in the week ended June 2 from a revised 389,000 the prior week that was higher than initially estimated, the Labor Department said. The median estimate of 49 economists surveyed by Bloomberg News called for 378,000 claims.
China’s benchmark one-year lending rate will drop to 6.31 percent from 6.56 percent effective tomorrow, the People’s Bank of China said on its website today. The one-year deposit rate will fall to 3.25 percent from 3.5 percent.