Treasuries Climb as Bernanke Keeps Further Bond-Buying on Table

Treasury 10-year yields capped the biggest two-week drop in a year as Federal Reserve Chairman Ben S. Bernanke signaled the central bank may buy more bonds under quantitative easing to lower unemployment.

U.S. government securities climbed, pushing 10-year yields to almost a four-week low, as Bernanke said in a speech yesterday in Jackson Hole, Wyoming, that joblessness is a “grave concern.” A Labor Department report Sept. 7 may show U.S. employment growth slowed in August.

“There’s been a bid to safer assets on concern about whether or not the Fed was going to do QE,” said Dan Greenhaus, chief global strategist at the broker-dealer BTIG LLC in New York. “The jobs number is the most important thing next week. In gauging the odds of QE, the August jobs report becomes crucial. If you get a surprise to the upside and a drop in the unemployment rate, the situation gets much more complicated.”

Ten-year yields slid 26 basis points, or 0.26 percentage point, over the past two weeks amid speculation the Fed will buy more assets. That’s the biggest drop since the period ended Sept. 9, 2011.

The benchmark yield decreased 14 basis points to 1.55 percent this week in New York, according to Bloomberg Bond Trader prices. It reached past its 50-day moving average of 1.59 percent yesterday and touched 1.54 percent, the lowest level since Aug. 6. The price of the 1.625 percent security maturing in August 2022 climbed 1 1/4, or $12.50 per $1,000 face amount, to 100 22/32.

Thirty-year bond yields fell 13 basis points to 2.67 percent and touched 2.66 percent, the lowest level since Aug. 7.

August Loss

Treasuries still lost 0.4 percent in August, paring their 2012 return to 2.3 percent, a Bank of America Merrill Lynch bond index shows.

U.S. government bonds jumped to the most expensive level in a month yesterday. The 10-year term premium, a model created by economists at the Fed that includes expectations for interest rates, growth and inflation, was negative 0.96 percent, the most costly since July 31. A negative reading indicates investors are willing to accept yields below what’s considered fair value. The average for the year is negative 0.73 percent.

Bernanke told central bankers and economists at the Kansas City Fed’s annual economics symposium that “nontraditional policies” should not be ruled out if economic conditions warrant them. He emphasized that a new round of bond buying is an option, and repeated the Federal Open Market Committee’s last statement that the central bank “will provide additional policy accommodation as needed” to spur growth.

More Purchases

“The sentiment is that the Fed will be doing more security purchases and expanding the balance sheet yet another time,” said Mark MacQueen, partner and money manager in Austin, Texas, at Sage Advisory Services Ltd., which oversees $10 billion. “He somewhat reassured the market that he’s willing to do more.”

The Fed chief’s speech came two weeks before the next meeting of the policy-setting FOMC. Many officials at the committee’s previous meeting said additional stimulus probably will be needed soon unless the economy showed a “substantial and sustainable strengthening,” according to minutes of their July 31-Aug. 1 discussions.

The U.S. unemployment rate has stayed above 8 percent since February 2009. It was 4.4 percent in October 2006.

U.S. employers added 125,000 jobs in August, fewer than the 163,000-position increase in July, economists in a Bloomberg News survey forecast before the Labor Department reports the data on Sept. 7. The unemployment rate will remain at 8.3 percent, they projected.

Balance Sheet

The Fed has expanded its balance sheet with two rounds of quantitative easing. In the first, which ran from 2008 to 2010, the central bank bought $1.25 trillion of mortgage-backed securities, $175 billion of federal agency debt and $300 billion of Treasuries. In the second round, from 2010 to 2011, the Fed purchased $600 billion of Treasuries.

Policy makers have held their benchmark overnight target rate at zero to 0.25 percent since December 2008 and have said it will remain there until at least late 2014.

Treasuries also gained this week as inflation indicators spurred speculation the central bank has room to add stimulus. The Fed’s favored bond-market gauge of inflation expectations was at 2.54 percent on Aug. 28, down from a 2012 high of 2.78 percent on March 19. 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 average for the past decade is 2.75 percent.

‘Near Certainty’

Bill Gross, co-chief investment officer and founder of Newport Beach, California-based Pacific Investment Management Co., manager of the world’s biggest bond fund, said in a Twitter post yesterday more stimulus is a “near certainty,” CNBC reported. “It will be open-ended, but increasingly impotent,” Gross wrote.

Hedge-fund managers and other large speculators reduced their net-long position in 10-year note futures in the week ended Aug. 28, according to data from the U.S. Commodity Futures Trading Commission.

Speculative long positions, or bets prices will rise, outnumbered short positions by 50,692 contracts on the Chicago Board of Trade. Net-long positions fell by 46,848 contracts, or 48 percent, from a week earlier, the Washington-based commission said in its Commitments of Traders report.

Note Auctions

The U.S. sold $99 billion in notes this week, including $35 billion in two-year debt, an equal amount of five-year securities and $29 billion in seven-year notes.

The securities drew greater demand than at the government’s auctions of the same amounts of the notes a month earlier. The average bid-to-cover ratio, a gauge of demand that compares the amount bid with the amount offered, was 3.22 at this week’s sales. The average ratio at the July offerings, when each note drew a record low sale yield, was 3.12.

Treasuries also gained this week amid concern European leaders are struggling to contain the euro bloc’s debt crisis. The European Central Bank meets next week amid speculation that its president, Mario Draghi, may unveil details of an effort to lower borrowing costs of Spain and Italy, which may include the central bank buying sovereign debt. Bond buying is opposed by Germany’s Bundesbank.

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