Treasuries Snap Loss After Bernanke Notes ‘Struggle’

Treasuries snapped a two-day decline after Federal Reserve Chairman Ben S. Bernanke said people are struggling economically, fueling speculation he is open to increasing bond purchases to spur growth.

Treasuries returned 6.8 percent in the 12 months to yesterday, based on Bank of America Merrill Lynch data, reflecting demand for U.S. debt as a haven from slowing economic growth and Europe’s debt crisis. The rally was interrupted this month after a U.S. report Aug. 3 showed the nation added more jobs than economists projected. The government is scheduled to sell $32 billion of three-year notes today, $24 billion of 10-year debt tomorrow and $16 billion of 30-year bonds on Aug. 9.

“If Bernanke thinks they should do something to support the economy, it will put downward pressure on yields,” said Kei Katayama, who buys U.S. government debt in Tokyo for Daiwa SB Investments Ltd., which manages the equivalent of $63.6 billion. “That makes it very difficult to sell.”

Benchmark 10-year yields were little changed at 1.57 percent as of 6:50 a.m. in London, according to Bloomberg Bond Trader prices. The record low was 1.38 percent July 25. The price of the 1.75 percent security due in May 2022 was 101 21/32 today.

The rate climbed nine basis points, or 0.09 percentage point, over the past two trading sessions.

Australia’s central bank kept interest rates unchanged at a developed-world high of 3.5 percent, citing a domestic expansion that’s weathering a global slowdown.

‘Difficult’ Conditions

“Even though some key aggregate metrics -- including consumer spending, disposable income, household net worth, and debt service payments -- have moved in the direction of recovery, it is clear that many individuals and households continue to struggle with difficult economic and financial conditions,” Bernanke said yesterday in remarks prepared for a conference in Cambridge, Massachusetts.

The U.S. 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’s 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 central bank is scheduled to buy as much as $5 billion of Treasuries due from August 2018 to May 2020 today as part of the program, according to the Fed Bank of New York website.

The Fed said Aug. 1 it will pump fresh stimulus if necessary to boost growth and reduce an unemployment rate that has been stuck at 8 percent or higher for more than three years.

Merkel’s Backing

German Chancellor Angela Merkel’s government backed European Central Bank President Mario Draghi’s proposals on bond buying to help reduce borrowing costs in Spain and Italy, a spokesman for Merkel told reporters yesterday.

The three-year U.S. notes scheduled for sale today yielded 0.335 percent in pre-auction trading, versus 0.366 percent the last time the notes were sold on July 10.

Investors submitted orders to buy 3.52 times the amount of available debt last month. The average over for the past 10 sales is 3.49.

Indirect bidders, which include foreign central banks, purchased 30 percent of the securities, versus the 10-sale average of 34.9.

Investor appetite for the safety of Treasuries ebbed this month after a U.S. employment report Aug. 3 showed the nation added 163,000 jobs, versus 100,000 projected by a Bloomberg News survey of economists.

Mortgage Bonds

Fidelity Investments, the Boston-based fund company that oversees $1.58 trillion, is bullish on privately issued mortgage bonds because of improvement in the U.S. housing market, according to a report on its website yesterday.

“We consider it our best idea in fixed income,” said Bryan Whalen, co-manager of the TCW Total Return Bond Fund, according to the report. The securities consist of thousands of home loans made by private lenders that are packaged and sold as bonds.

The bonds yield about 7.5 percent and are up 11.4 percent on average this year, the report said.

Whalen’s fund has about 34 percent of assets in the securities, according to the website. TCW Total Return has gained 7.6 percent in the past year, beating 94 percent of its peers, according to data compiled by Bloomberg.

Yields indicate demand for securities beyond the government bond market.

Narrower Spread

The difference between rates on two-year swaps and same-maturity U.S. debt shrank to as low as 19 basis points yesterday, the least in 13 months.

Investors use swaps to exchange fixed and floating interest-rate obligations. The difference, the gap between the fixed component and the Treasury rate, is a gauge of investor demand for higher-yielding assets.

The Fed’s pledge to help the economy as needed “should keep the U.S. rates market well supported for the time being,” according to Zach Pandl, the Minneapolis-based senior interest rate strategist at Columbia Management Investment Advisers LLC. Columbia, which oversees $331 billion, posted the comment on its website yesterday.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE