Treasuries rose amid speculation the purchase of euro-region bonds by the European Central Bank may not be enough to stem the sovereign-debt crisis, stoking demand for U.S. government debt.
The yield on the 10-year note dropped from the highest in three weeks as ECB central bank policy makers prepare to meet on Aug. 2. The benchmark yield fell to a record 1.3790 percent on July 25 amid concern that Europe’s fiscal turmoil is harming economic growth, before jumping at the end of last week after policy makers pledged to support the euro. The Treasury boosted its third-quarter-borrowing estimate.
“The market got ahead of itself on Friday,” said Justin Lederer, an interest rate strategist at Cantor Fitzgerald LP in New York, one of 21 primary dealers that trade with the Federal Reserve. “It’s a complete reversal. There are still uncertainties, most notably in Europe.”
Benchmark 10-year yields fell four basis points, or 0.04 percentage point, to 1.50 percent at 5:02 p.m. New York time, according to Bloomberg Bond Trader prices. The yield reached 1.59 percent on July 27, the highest since July 6. The price of the 1.75 percent security due May 2022 rose 13/32, or $4.06 per $1,000 face amount, to 102 1/4.
Treasury trading volume reported by ICAP Plc, the largest inter-dealer broker of U.S. government debt, dropped to $203.4 billion at 5:01 p.m. in New York from $330.3 billion July 27. That figure last week was the highest since June 6. Trading has averaged $240.1 billion this year.
Draghi’s pledge last week to do “whatever it takes’” to stem the crisis raised concern he has to produce a plan or face renewed selling in European bond markets, where rising Spanish and Italian yields have fueled speculation that the euro bloc will break up.
“The market doesn’t have a lot of trust that they’ll do anything,” said Thomas Roth, senior trader in New York at Mitsubishi UFJ Securities USA Inc. “They have to prove themselves.”
The yield on the German 10-year bund declined two basis points to 1.38 percent. Spanish 10-year yields slid 13 basis points to 6.61 percent, falling for the fourth consecutive day.
The Federal Open Market Committee starts a two-day meeting tomorrow. While policy makers refrained from introducing a third round of asset purchases at their meeting last month, Fed Chairman Ben S. Bernanke indicated in two days of testimony in Washington ending July 18 that it’s an option. The benchmark rate has been in a range between zero and 0.25 percent since December 2008.
The U.S. central bank purchased $2.3 trillion in securities in two rounds of a strategy called quantitative easing from 2008 to 2011 to spur the economic recovery. In an existing program called Operation Twist, the central bank is swapping short-term Treasuries in its holdings for longer maturities.
Policy makers may this week extend the commitment to low rates “at least through mid-2015,” Robert V. DiClemente, Citigroup Inc.’s chief U.S. economist, wrote in a report today. If the committee forges ahead with QE3, it would be about $400- $500 billion and focus largely on mortgage-backed securities, he wrote, adding that Operation Twist would be kept in place as scheduled.
“The tone will be more dovish, but ultimately they won’t actually embark on any major differences in the current policy stance,” on Aug. 1, said Ira Jersey, an interest-rate strategist at Credit Suisse Group AG in New York, one of 21 primary dealers that trade directly with the Fed, in an interview with Tom Keene and Ken Prewitt on Bloomberg Radio. “September is probably the more likely time.”
If the July and August employment numbers are below 100,000 then the Fed may embark upon purchases of mortgages, Jersey said.
Employers in the U.S. added 100,000 workers in July, following a gain of 80,000 in June, according to the median forecast of economists surveyed by Bloomberg News before Labor Department figures on Aug. 3. Unemployment stayed at 8.2 percent, a separate survey predicts.
The central bank purchased $1.8 billion of Treasuries due from February 2036 to February 2042 today. The purchases are part of the U.S. central bank’s plan to lower borrowing costs by swapping short-term Treasuries in its holdings for longer maturities.
The U.S. Treasury Department raised its net borrowing estimate for the current quarter, reflecting in part lower revenue, higher spending and higher issuances of state and local government securities.
The Treasury increased its estimate for July to September to $276 billion, which is $12 billion higher than projected in April. Treasury officials see net borrowing of $316 billion in the quarter starting Oct. 1. In the quarter that ended June 30, the Treasury borrowed $172 billion, compared with a previous estimate of $182 billion.
The Treasury will make its so-called quarterly refunding announcement on Aug. 1. The government has sold $32 billion in three-year notes, $24 billion in 10-year debt and $16 billion in 30-year bonds each refunding month since November 2010. Quarterly refundings are held each February, May, August and November.
For all the concern over the slowdown in the U.S. economy, the bond market shows there’s less risk of deflation now than before the Fed’s first two rounds of large-scale debt purchases.
The Fed’s favored bond-market gauge of inflation expectations was at 2.39 percent last week, above the 2 percent levels in 2008 and 2010 that led the central bank to inject $2.3 trillion into the economy by buying Treasuries and mortgage-related bonds, a policy known as quantitative easing. The five-year, five-year forward break-even rate shows how much traders anticipate consumer prices will rise during a period of five years starting in 2017.
The expectation that consumer prices will increase means Fed Chairman Ben S. Bernanke has persuaded traders the U.S. will avoid the deflation that has slowed Japan’s economy since 1995.
U.S. 10-year yields will rise to 1.88 percent by year-end, based on forecasts in a Bloomberg survey of financial companies, with the most recent projections given the heaviest weightings.
Treasuries have returned 0.7 percent this month through July 27, according the Bank of America Merrill Lynch indexes. They have returned 2.4 percent in 2012, compared with a 3.3 percent return for German debt and 3.5 percent for U.K. gilts, the indexes show.