Treasuries gained for a second day, recouping almost half the losses posted since Federal Reserve policy makers announced more debt purchases last week, on bets the U.S. economy will struggle to expand even with stimulus.
Yields on 30-year bonds have declined eight basis points in the past two days, after surging 17 basis points following the conclusion of the Federal Open Market Committee meeting Sept. 13. The central bank is unlikely to stop buying Treasuries when its separate Operation Twist program ends in December, some of Wall Street’s biggest bond-trading firms said. International net purchases of Treasuries rose to $50 billion in July from $32.4 billion the month before, government data showed today.
“Despite the Fed’s action, the reality is we haven’t had any fundamental change in the economic picture at the end of the day, and that has underscored the resilience of Treasuries,” 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 break to higher yields will have to wait a bit.”
Thirty-year yields fell three basis points, or 0.03 percentage point, to 3.01 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. They touched 3.12 percent yesterday, the highest since May, before they began falling. The price of the 2.75 percent security due in August 2042 gained 18/32, or $5.63 per $1,000 face amount, to 94 31/32.
The benchmark 10-year yield dropped three basis points to 1.81 percent. It touched a record low of 1.379 percent on July 25 before increasing to 1.89 percent on Sept. 14, also the highest since May.
The Federal Open Market Committee said in a statement Sept. 13 it will make open-ended purchases of $40 billion of mortgage debt a month as it seeks to boost economic growth and reduce unemployment. The committee said it will continue its purchases and take additional steps as needed “if the outlook for the labor market does not improve substantially.” The unemployment rate has been stuck above 8 percent for 43 straight months.
New York Fed President William C. Dudley said today the central bank’s new stimulus is vital for boosting “unacceptably slow” improvement in economic growth.
Dudley said in response to audience questions after a speech in Florham Park, New Jersey, that the Fed’s policies are “pushing hard” to boost economic growth, which will ultimately allow the central bank to normalize interest rates.
“Near term, the economic outlook is that the growth pace is likely to remain disappointing,” Dudley said.
The Fed also said last week it will continue its program to swap $667 billion in shorter-term debt in its holdings with longer-term Treasuries through December, when it’s scheduled to end. The effort, known as Operation Twist, is designed to lower long-term borrowing costs.
Bank of America Corp., Jefferies & Co. Inc. and Barclays Plc, which are also primary dealers, predicted the Fed will keep buying Treasuries once the program is completed.
“If the pace of economic growth stays close to where it is now, then it will be hard for the Fed in December to make the argument that we’ve had sustained and substantial improvement,” Priya Misra, head of U.S. rates strategy at Bank of America Merrill Lynch in New York, said during a telephone interview. “The Fed will effectively continue Operation Twist in January without the debt sales. If they let the Treasury purchases stop, it would be de-facto tightening monetary policy.”
The central bank bought $4.6 billion of Treasuries today due from September 2018 to August 2020 as part of the program.
Investors in Treasuries remained bullish over the past week, betting prices of the securities will increase even as they increased neutral positions, according to a survey by JPMorgan Chase & Co.
The proportion of net longs was at six percentage points in the week ended yesterday, according to JPMorgan. It was down from eight percentage points in the previous week. The percent of outright longs dropped to 21, from 23 percent the previous week, the survey said. The percent of outright shorts, or bets the securities will fall in value, remained at 15 percent. Investors raised neutral bets to 64 percent, from 62 percent.
Global demand for U.S. financial assets climbed in July as foreign investors sought shelter from the debt crisis in Europe, a Treasury Department report showed today. Net buying of long-term equities, notes and bonds totaled $67 billion during the month, compared with net purchases of $9.3 billion in June, the department said.
China remained the biggest foreign owner of Treasuries after its holdings rose $2.6 billion, to $1.15 trillion, according to the data. Japan, the second-largest foreign lender to the U.S., boosted its holdings by $7 billion, or 0.6 percent, to $1.12 trillion.
“Investors remain tethered to a perceived safe-haven region,” Adrian Miller, a fixed-income strategist at GMP Securities LLC in New York, wrote in a note to clients. “We expect U.S. assets will continue to draw a premium bid tied to being the asset group that is likely to provide the best opportunity to generate superior risk-adjusted results over the near to medium term.”
Relative yields on mortgage securities were the lowest on record after the Fed said last week it would make monthly purchases of the debt.
A Bloomberg index of yields on Fannie Mae-guaranteed mortgage bonds trading closest to face value was 84 basis points higher than an average of five- and 10-year Treasury rates in New York. It was the narrowest spread since at least 1984.
Stocks are beating U.S. government bonds this year. Treasuries returned 1.3 percent in 2012 through yesterday, Bank of America Merrill Lynch indexes show. The Standard & Poor’s 500 Index gained 18 percent, including reinvested dividends.
Treasuries were supported earlier today as a survey showed German investor sentiment was negative for a fourth month in September, boosting demand for the safest assets. The ZEW Center for European Economic Research in Mannheim said its index, of investor and analyst expectations, which aims to predict economic developments six months in advance, rose to minus 18.2 from minus 25.5 in August.