Treasuries fell, boosting yields from almost record lows, after the Federal Reserve declined to boost monetary stimulus while indicating a sluggish economy may prompt further steps to boost growth.
Before their next central bank meeting Sept. 12, Fed Chairman Ben S. Bernanke and his colleagues will assess reports on unemployment in July and August, and the European Central Bank may take steps to ease Europe’s debt crisis at a meeting tomorrow. Eighty eight percent of economists expected U.S. policy makers to refrain today from starting new bond purchases, while 48 percent said the Fed will announce the buying at its September meeting, according to the July 25-27 Bloomberg News survey.
“They’re saving their limited remaining ammunition for a time when there’s more stress,” said Daniel Dektar, the chief investment officer at Chapel Hill, North Carolina-based Smith Breeden Associates, which oversees $6.5 billion. “The Fed wants to keep rates low. On the margin rates aren’t going anywhere unless the outlook for growth or risks changes substantially.”
The U.S. 10-year yield rose five basis points, or 0.05 percentage point, to 1.52 percent at 5:17 p.m. in New York, according to Bloomberg Bond Trader prices. The 1.75 percent note maturing in May 2022 fell 1/2, or $5 per $1,000 face amount, to 102 1/32. The 30-year yield also increased five basis points to 2.60 percent.
“Economic activity decelerated somewhat over the first half of this year,” the Federal Open Market Committee said today at the conclusion of a two-day meeting in Washington. “The committee will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”
Central bank policy makers kept their target interest rate in a range of zero to 0.25 percent through 2014.
“This meeting was about discussing what they would do if they decided to do it,” said Dominic Konstam, global head of interest rates research in New York at Deutsche Bank AG, one of 21 primary dealers that trade Treasuries with the Fed. “The lack of policy initiatives right now keeps yields lower and continues to keep the risk-off mind set in place.”
Treasuries securities reached record low yields last week, pushing the yield on the 10-year note to 1.379 percent on July 25 amid concern the European debt crisis was slowing the global economy. The 30-year bond yield touched a record 2.441 percent on July 26.
U.S. debt of all maturities has returned 2.8 percent this year, compared with 9.8 percent in 2011, according to indexes compiled by Bank of America Merrill Lynch. Their German counterparts have returned 4.1 percent, while Spanish debt lost 5.1 percent.
The U.S. economy cooled in the second quarter as limited job growth prompted Americans to curb spending while state and local governments cut back.
Gross domestic product, the value of all goods and services produced, rose at a 1.5 percent annual rate after a revised 2 percent gain in the prior quarter, Commerce Department data showed in Washington on July 27. Household purchases, which account for about 70 percent of GDP, grew at the slowest pace in a year.
Companies in the U.S. added 163,000 workers in July, according to figures from Roseland, New Jersey-based ADP Employer Services released today The median estimate in a Bloomberg News survey called for an advance of 120,000.
The government will say Aug. 3 the unemployment rate held above 8 percent in July for the 42nd-straight month, the median estimate of more than 81 economists surveyed by Bloomberg shows.
Developed nations’ central banks, from the Fed to the ECB, have cut rates to record lows since 2008. The Fed’s benchmark rate is in a range of zero to 0.25 percent.
The Fed’s QE program started with a November 2008 commitment to buy $500 billion of mortgage securities and $100 billion of debentures of Fannie Mae and Freddie Mac. Policy makers raised the purchase targets in March 2009 to $1.25 trillion of mortgage bonds, $200 billion of agency debt and added $300 billion of Treasuries. In November 2010, the Fed announced it would acquire $600 billion of Treasuries.
Indications that consumer prices will rise, measured by the five-year, five-year forward break-even rate, means that Bernanke has persuaded traders the U.S. will avoid the chronic deflation that has slowed Japan’s economy since 1995. It also complicates the central bank’s decision about starting more quantitative easing to boost an economy that grew at the slowest pace in a year during the second quarter. Commodity prices surged during QE1 and QE2 in 2008 and 2010.
“If the economy stays status quo, they will do more,” said Leslie Barbi, head of public fixed income overseeing $30 billion in fixed-income assets at Guardian Life Insurance Co. of America in New York. “Europe is in crisis, but it’s global economic data that has been fairly weak recently. It’s a supportive factor that has created demand for Treasuries.”
The 10-year note will rise to 1.84 percent by year-end, according to the median estimate in a Bloomberg News survey of economists. The low forecast is 1.35 percent and the high is 3.25 percent.