Treasuries Recoup Most of QE3 Losses Amid Growth Concern

Treasuries rose for a third day, recovering most of the losses posted since the Federal Reserve announced more debt purchases last week, as investors bet the U.S. economy faces a struggle even with additional stimulus.

The yield on the benchmark 10-year note was almost back to its closing level of Sept. 12, the day before the Fed announced a third round of bond-buying in the quantitative-easing stimulus strategy. Treasuries’ three-day climb is their longest winning streak this month. They pared gains as risk appetite rose after sales of existing American homes increased more than forecast.

“The euphoria from QE is waning as the economy is still weak and investors are worried that central-bank action isn’t enough without action on the fiscal side as well,” said Larry Milstein, managing director in New York of government and agency debt trading at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors. “We can still see more rallying in Treasuries.”

The U.S. 10-year yield dropped four basis points, or 0.04 percentage point, to 1.77 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. It touched 1.76 percent, where it had closed on Sept. 12 before climbing to a four-month high of 1.89 percent two days later. The price of the 1.625 percent note due in August 2022 added 10/32, or $3.13 per $1,000 face amount, to 98 21/32.

Thirty-year yields decreased five basis points to 2.96 percent and reached as low as 2.95 percent.

Volatility Drops

Volatility fell to the lowest level since May. Bank of America Merrill Lynch’s MOVE index, which measures price swings based on options, slid to 57.5 basis points, approaching the 2012 low of 56.7 basis points reached on May 7. It touched a high for the year of 95.4 basis points on June 15. The average over the past decade is 100.4 basis points.

“It’s more about the Fed market purchases,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “It’s creating an illiquid market.”

About $257 billion in Treasuries changed hands today as of 5:01 p.m. in New York through ICAP Plc, the world’s largest interdealer broker. Daily volume reached $464 billion on Sept. 13, the most since August 2011, and averaged $262 billion over the past five years.

Stocks gained, with the MSCI World Index erasing losses and advancing 0.3 percent, after sales of existing homes in the U.S. increased more than forecast in August. Purchases rose 7.8 percent to a 4.82 million annual rate, the most since May 2010, National Association of Realtors data showed. A Bloomberg News survey forecast was for a rise to 4.56 million.


“The housing numbers were negative for bonds,” said Paul Horrmann, a broker in New York at Tradition Asiel Securities Inc., an interdealer broker. “We have seen some profit-taking. There’s a lot of positiveness going on in the stock market.”

Fed Bank of Dallas President Richard Fisher said the housing market is leading the U.S. economic recovery, which he said hasn’t been assisted much by the Fed’s purchases of bonds.

“The housing market is on the move,” Fisher said today on Bloomberg Radio’s “Hays Advantage” with Kathleen Hays. “I question the efficacy of these large-scale asset purchases.”

The difference in yield between 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of traders’ outlook for consumer prices over the life of the debt known as the break-even rate, narrowed to 2.54 percentage points today after touching 2.73 on Sept. 14, the most since 2006. It has averaged 2.21 percentage points this year.

TIPS Auction

The Treasury is scheduled to auction $13 billion in 10-year TIPS tomorrow. The notes yielded negative 0.855 percent in pre-auction trading. If it holds near that level, the sale would be the fifth consecutive offering of the securities where investors were willing to pay the U.S. to hold their principal.

U.S. government securities were at the most expensive level in almost a week. The 10-year term premium, a model created by economists at the Fed that includes expectations for interest rates, growth and inflation, was negative 0.86 percent, the most costly since Sept. 13. A negative reading indicates investors are willing to accept yields below what’s considered fair value. The average this year is negative 0.74 percent.

Treasuries slid for the past two weeks as the European Central Bank announced on Sept. 6 a plan to purchase bonds of troubled euro members to help contain market turmoil in the 17-nation region and Fed Chairman Ben Bernanke said Sept. 13 the U.S. central bank will keep adding stimulus to the economy.

The Fed said it will buy $40 billion of mortgage bonds a month to pump money into the economy and boost employment.

The U.S. jobless rate has been more than 8 percent for 43 months, prompting Bernanke to pledge to continue buying bonds until the labor market improves “substantially.”

Quantitative Easing

The Fed previously purchased $2.3 trillion of assets in two rounds of quantitative easing from 2008 to 2011 to spur growth.

The central bank also is in the process of exchanging shorter-term Treasuries in its holdings with those due in six to 30 years to put downward pressure on long-term borrowing costs. It bought $1.8 billion today in U.S. securities maturing from February 2036 to May 2042 as part of the program.

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