Treasuries climbed, pushing yields toward record lows, after European Central Bank President Mario Draghi failed to take immediate steps to support the economy.
U.S. government debt reversed an earlier decline as Draghi said there was “severe malfunctioning” in the region’s debt markets while stopping short of announcing concrete measures to resolve the situation, pushing Spanish and Italian bond yields higher. He spoke after policy makers kept the benchmark interest rate on hold at 0.75 percent. The number of Americans filing applications for unemployment benefits rose last week before a report tomorrow forecast to show the unemployment held steady above 8 percent.
“All risk assets built in the possibility that they were going to come in with something very solid today, and he didn’t deliver on any measure at all,” Tom Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp., said in a telephone interview. “We thought there was going to at least be a relief valve created, and they couldn’t even produce that.”
The 10-year yield fell five basis points, or 0.05 percentage point, to 1.48 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. The 1.75 percent note maturing in May 2022 rose 13/32, or $4.06 per $1,000 face amount, to 102 15/32. The yield touched 1.38 percent on July 25, the lowest ever.
The 30-year yield fell four basis points to 2.55 percent after touching an all-time low of 2.4405 percent on July 26.
Volatility climbed yesterday to 74.1 basis points, the highest since June 22, according to Bank of America Merrill Lynch’s MOVE index. It dropped to a five-year low of 56.7 basis points on May 7, and has averaged 75 basis points this year, touching a 2012 high of 95.4 basis points on June 15. The index measures price swings based on options.
“The market was anticipating we would get an actual plan as opposed to the measures that they appear to be considering,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee. “It doesn’t quite match the buildup to this morning’s press conference. It’s not yet the all-clearing announcement that people were anticipating.”
Any ECB bond purchases will be conducted in a way to soothe investors’ concerns about seniority, Draghi told reporters at a press conference in Frankfurt today. Details of the bond purchase plan will be fleshed out in coming weeks, he said.
The additional yield investors demand to hold Italian and Spanish 10-year bonds over the nations’ two-year notes widened after Draghi’s comments, with the spread between Italy’s two-and 10-year yields growing to as much as 258 basis points at 4:25 p.m. London time, the most since May 14. Spain’s spread increased to 235 basis points, the biggest since July 5.
Yields on Spanish bonds due in 10 years rose as high as 7.2 percent, while the interest rate on similar-maturity Italian debt touched 6.35 percent.
“It comes across as an attempt to buy some more time, having bought some time last week with his statements,” said Carl Lantz, head of interest-rate strategy in New York at Credit Suisse AG, a primary dealer. “I don’t think the market has a lot of patience for that.”
Jobless claims climbed by 8,000 to 365,000 in the week ended July 28, Labor Department figures showed today in Washington. The median forecast of 47 economists surveyed by Bloomberg News called for an increase to 370,000.
The U.S. economy added 100,000 workers last month, following a gain of 80,000 in June, according to a Bloomberg survey of economists before tomorrow’s Labor Department report. The jobless rate will stay at 8.2 percent, according to economists. It has been more than 8 percent since February 2009.
“Even if you get a very positive number, it’s only one month, and we’re still not where we want to be,” Justin Lederer, an interest-rate strategist in New York at primary dealer Cantor Fitzgerald LP. “I still believe the Fed does another purchase program in September.”
Treasuries fell yesterday after the Fed refrained from boosting monetary stimulus while indicating a sluggish economy may prompt further steps to spur growth.
The central bank bought $2.3 trillion of mortgage and Treasury debt from 2008 to 2011 in two rounds of so-called quantitative easing to cap borrowing costs. It is now in the process of swapping shorter-term Treasuries in its holdings with those due in six to 30 years to put downward pressure on long-term borrowing costs.
The Fed purchased $1.83 billion of Treasuries due from February 2036 to February 2042 today as part of its Operation Twist program.
There is a “significant chance” the Fed will implement a third round of quantitative easing at its September meeting as the economic data weaken, according to a report yesterday by Michael S. Hanson, U.S. economist at Bank of America Corp. in New York, and other economists and strategists at the company.