Treasury 10-Year Notes in Longest Rally Since April on Fed Bets

Treasuries rose, with 10-year notes gaining for a fifth day in their longest winning streak since April, as a jump in initial claims for jobless benefits boosted speculation the Federal Reserve will add to monetary stimulus.

Thirty-year yields approached their low of the day after Republican presidential challenger Mitt Romney said he doesn’t back a third round of debt purchases under quantitative easing by the Fed. The central bank, in minutes released yesterday of its last meeting, signaled readiness to boost stimulus unless it’s convinced the economy is poised to rebound. A sale of U.S. five-year inflation-linked notes drew a record low yield.

“The minutes were incredibly dovish,” said Brian Edmonds, head of interest rates at Cantor Fitzgerald LP in New York, one of 21 primary dealers that trade with the Fed. “The minutes set the tone. The market is taking it as if QE3 is in the bag.”

The 10-year Treasury note yield fell one basis point, or 0.01 percentage point, to 1.68 percent at 5:04 p.m. New York time, according to Bloomberg Bond Trader prices. It touched 1.66 percent, the lowest level since Aug. 14. The price of the 1.625 percent security due in August 2022 rose 1/8, or $1.25 per $1,000 face amount, to 99 1/2.

Thirty-year yields fell one basis point to 2.79 percent. They rose to 2.82 percent before the jobless claims data.

The long bond yields fell to 2.78 percent after Romney told Fox Business the second round of quantitative easing didn’t work and further action would hurt the dollar. He said he wants a “new person” to replace Ben S. Bernanke as Fed chairman. The yields touched 2.77 percent earlier before paring their decline.

“Marginally, it adds another level of uncertainty,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut.

Volume Declines

Treasury trading volume reported by ICAP Plc, the largest inter-dealer broker of U.S. government debt, decreased to about $250 billion, from $285 billion yesterday. Daily volume has averaged $239 billion this year.

Volatility dropped to 65.5 basis points today in New York, the lowest level since July 26, according to Bank of America Merrill Lynch’s MOVE index. The 2012 average is 74.6 basis points. Volatility dropped to a five-year low of 56.7 basis points on May 7 and touched a 2012 high of 95.4 basis points on June 15. The index measures price swings based on options.

More Expensive

The term premium, a model created by economists at the Fed that includes expectations for interest rates, growth and inflation, showed Treasuries were almost the most expensive since Aug. 6. The gauge was negative 0.85 percent today, about the same as yesterday, after reaching negative 0.70 percent on Aug. 16, the least costly since May. It reached a record negative 1.02 percent, the most expensive level ever, on July 24. A negative reading indicates investors are willing to accept yields below what’s considered fair value.

The minutes of the Fed’s July 31-Aug. 1 meeting showed many policy makers said additional stimulus would probably be needed soon unless the economy shows signs of a durable pickup. Many participants said a new large-scale asset-purchase program “could provide additional support for the economic recovery,” the record showed.

The Fed is increasingly likely to ease further in late 2012 or next year, and there’s a 50 percent chance it will announce a form of quantitative easing at its September meeting, according to Rick Rieder, chief investment officer of fundamental fixed-income at New York-based BlackRock Inc., the world’s largest money manager. He spoke in an interview with Deirdre Bolton on Bloomberg Television’s “In The Loop.”

‘Long Time’

“Employment is going to take a very long time to get to the Fed’s mandate of full employment, which means they’re going to be on hold for a long time,” Rieder said. “I thought their comments yesterday were more aggressive than I think people would have thought.”

Jobless claims increased by 4,000 for a second week to reach 372,000 in the period ended Aug. 18, Labor Department data showed today in Washington. The median forecast of 41 economists surveyed by Bloomberg called for 365,000. The four-week moving average, a less volatile measure, increased to 368,000.

The U.S. sold $14 billion of five-year Treasury Inflation Protected Securities, or TIPS, today at a record low auction yield of negative 1.286 percent. The notes are due in April 2017. The size of the sale tied an April 2011 offering for the second-largest auction ever of five-year TIPS. The $16 billion offering this April was the biggest.

Increased Appetite

“It was strong any way you slice it,” Michael Pond, co-head of interest-rate strategy in New York at the primary dealer Barclays Plc, said in an e-mail. “Clearly, yesterday’s Fed minutes have increased investors’ appetite for TIPS, particularly at the short end of the curve.”

Investors bid for 3.11 times the amount offered, the highest bid-to-cover ratio since April 2010, versus an average of 2.64 at the past 10 auctions of the debt.

Indirect bidders, a category that includes foreign central banks, bought 34.4 percent of the securities, compared with an average of 36.5 percent at the past 10 offerings. Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 15.2 percent, versus an average 6.4 percent at the past 10 sales.

TIPS have returned 4.7 percent this year, compared with a 1.8 percent gain in the broader Treasuries market, according to Bank of America Merrill Lynch indexes.

Note Sales

The Treasury said it will sell $35 billion of two-year debt on Aug. 28, the same amount of five-year notes the following day and $29 billion of seven-year securities on Aug. 30. The amounts were unchanged from last month’s sales of the securities.

The Fed bought $1.8 billion today of Treasuries due from November 2022 to February 2031. The purchase was part of the central bank’s efforts to exchange shorter-term Treasuries in its holdings for those due in six to 30 years to support the economy by putting downward pressure on long-term borrowing costs.

Treasuries gained earlier as China’s purchasing managers’ index fell to 47.8 in August from a final reading of 49.3 for July, according to HSBC Holdings Plc and Markit Economics.

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