Treasury Yields Trade at Almost 3-Week Lows on Bernanke

Treasury 10-year note yields traded at almost a three-week low as Federal Reserve Chairman Ben S. Bernanke said inflation would remain in check as he renewed a pledge to sustain stimulus after the U.S. expansion gains strength.

Benchmark 10-year yields extended earlier declines as data indicating slower growth in Europe and Asia bolstered demand for the safety of U.S. government debt. They briefly rose after the Institute for Supply Management’s U.S. factory index showed growth for the first time since May. The Fed purchased $4.8 billion in Treasuries as part of its Operation Twist program.

“Even with today’s ISM, there’s still any number of significant headwinds we have to go through before you can say the coast is clear,” said Tom Porcelli, chief U.S. economist in New York at Royal Bank of Canada’s RBC Capital Markets unit, one of 21 primary dealers that trade with the Fed. “It will be difficult for Treasuries to find a different trajectory than what we’ve seen over the last several weeks.”

The benchmark 10-year note yield fell one basis point, or 0.01 percentage point, to 1.63 percent as of 5 p.m. New York time, according to Bloomberg Bond Trader prices. The 1.625 percent security due in August 2022 fell 2/32, or 63 cents per $1,000 face value, to 100. The yield, which dropped 12 basis points last week, fell to 1.60 percent on Sept. 28, the lowest level since Sept. 7.

The yield on the 30-year bond was little changed at 2.82 percent.

Treasury volume reported today in New York by ICAP Plc, the largest interdealer broker of U.S. government debt, dropped to $221 billion at 5:01 p.m. in New York, from $316 billion on Sept. 28. Daily volume has averaged $243 billion in 2012. It touched $464 billion Sept. 13, the highest in 13 months.

Bernanke’s View

Five years of low interest-rate policies “have not led to increased inflation,” and the public’s expectations for price gains “remain quite stable,” Bernanke told the Economic Club of Indiana. Fed officials have the necessary tools to tighten when needed to prevent “inflationary pressures down the road,” he said.

Policy makers’ forecast to hold the main interest rate close to zero until at least mid-2015 “doesn’t mean that we expect the economy to be weak through” that year, the Fed chief said.

A gauge of U.S. manufacturing rose to 51.5 in September from 49.6 a month earlier, the Tempe, Arizona-based group said today. Economists had forecast a rise to 49.7.

‘Stall Speed’

“We’re still in a stall-speed, low-growth trajectory,” said Thomas Simons, a government-debt economist in New York at Jefferies Group Inc., a primary dealer. “We’re not really changing our view on manufacturing.”

Fed Bank of San Francisco President John Williams said the U.S. economy and financial markets still face “severe challenges” in the aftermath of the 2007-2009 recession.

Treasuries returned 2.3 percent this year, according to Bank of America Merrill Lynch indexes. The securities returned 1.1 percent in the past two weeks of September, leaving them down 0.3 percent for the month.

“It’s a follow-through on the same global-growth concerns and actions by the Fed,” said Scott Sherman, an interest-rate strategist in New York at primary dealer Credit Suisse Group AG. It’s also “about how global growth can present a risk to our growth trajectory.”

Fed Buying

The central bank bought Treasuries maturing from November 2020 to August 2022 today as part of its program to swap shorter-term Treasuries for longer-term securities, according to its website.

The Fed has also purchased $2.3 trillion of securities between 2008 and 2011 in two rounds of another policy known as quantitative easing. The Fed said Sept. 13 it will buy $40 billion of mortgage-backed securities a month to support the economy by putting downward pressure on borrowing costs.

Investors initially increased their inflation expectations on the Fed’s plan to buy mortgage bonds. The gap between yields on 10-year notes and same-maturity Treasury Inflation-Protected Securities expanded to 2.73 percentage points on Sept. 17, the widest since May 2006.

The so-called break-even rate, which measures how much traders anticipate consumer prices will rise over the life of the debt, was at 2.42 percentage points today, little changed from the end of last week.

Demand to protect against higher long-term bond yields over the next six months has been static since the Fed announcement, Barclays Plc data show.

Payer Skew

The figures measure what traders call the payer skew using options on interest-rate swaps. The skew typically widens when traders anticipate a rise in yields as they seek to hedge the value of their holdings.

It’s now 25 cents for the shorter term, about unchanged from December, while it’s 89 cents for options that mature in 2015, up from 80 cents at the end of 2011. Each 10 cents represents $100,000 of bonds.

“The market is not suggesting there’s any kind of runaway inflation in the next one or two years given the below-trend growth trajectory and the impending fiscal cliff,” said Gemma Wright-Casparius, who manages the $43.9 billion Vanguard Inflation-Protected Securities Fund at Valley Forge, Pennsylvania-based Vanguard Group Inc.

The fiscal cliff refers to U.S. budget negotiations, including automatic tax increases and spending cuts that may be triggered pending deficit-reduction efforts.

High Volatility

Volatility in U.S government bonds was the highest in developed markets today, according to measures of 10-year or similar-dated debt, the spread between two-year and 10-year securities and credit-default swaps.

Treasuries were supported amid reports of slow global growth. Unemployment in the 17 nations using the euro reached 11.4 percent in August, the European Union statistics office in Luxembourg said today, the same as June and July after those months’ figures were revised higher.

Japan’s Tankan index for large manufacturers fell in the third quarter, the Bank of Japan said in Tokyo, showing the companies became more pessimistic. In Australia, factory output shrank at a faster pace in September, a private gauge showed. A government survey indicated China’s manufacturing contracted for a second month.

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