Treasuries rose for a fourth day as the Federal Reserve bought some of the 30-year bonds auctioned yesterday as part of its plan to keep borrowing rates low and investors sought a refuge from Europe’s sovereign-debt crisis.
Yields declined this week after investors showed higher-than-average demand at three- and 10-year note auctions and the International Monetary Fund cut global growth estimates. Yields briefly pared gains after a report today showed consumer confidence unexpectedly climbed to the highest level in five years.
“The market doesn’t want the Europeans to wait too long to find an ultimate solution, but they keep on procrastinating,” said Ira Jersey, an interest-rate strategist at Credit Suisse Group AG in New York, one of 21 primary dealers that trade with the Fed. The central bank’s purchases “helped stabilize the market, particularly after the decent confidence numbers,” Jersey said. “The buyback definitely helped.”
The 30-year bond yield fell two basis points, or 0.02 percentage point, to 2.83 percent, after climbing as high as 2.88 percent, at 5 p.m. in New York, according Bloomberg Bond Trader data. The rate reached a record-low 2.44 percent on July 26. The benchmark 10-year note yield declined one basis points to 1.66 percent.
The 10-year term premium, a model created by economists at the Fed that includes expectations for interest rates, growth and inflation, was negative 0.91 percent. A negative reading indicates investors are willing to accept yields below what’s considered fair value. The average for the past 10 years is 0.44 percent. The all-time low was negative 1.02 percent on July 24.
The Fed bought $1.889 billion of Treasuries maturing from February 2036 to August 2042 as part of its program known as Operation Twist, in which it is replacing $267 billion of short-term debt in its portfolio with longer-term Treasuries in an effort to reduce borrowing costs and counter risks of a recession.
“These buybacks are very powerful,” said Ray Remy, head of fixed income in New York at primary dealer Daiwa Capital Markets America Inc. “There’s no supply next week and we’re through supply this week. If nothing else happens in a vacuum, you’re going to move to lower yields because of that.”
The central bank, which purchased $2.3 trillion of Treasury and mortgage-related debt from 2008 to 2011 in two rounds of quantitative easing, began in September a third effort to buy $40 billion of mortgage debt a month until the economic recovery is well established.
A $21 billion sale of 10-year debt on Oct. 10 drew a bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, of 3.26 versus an average of 3.11 for the prior 10 sales. That came a day after a $32 billion auction of three-year notes drew a record high ratio of 3.96. An auction of $13 billion in 30-year bonds on Oct. 11 completed the $66 billion sale of debt this week.
Treasuries extended gains after Reuters reported that the European Stability Mechanism lacks the cash to bail out Spain if the country asks for help before the end of the year. However, guidelines obtained by Bloomberg News last month showed the fund has the authority to raise cash through the sale of fixed-income securities.
While the European Central Bank announced an unlimited bond-purchase program on Sept. 6 to stem financial turmoil, Spanish Prime Minister Mariano Rajoy has held off on deciding whether to request aid, a condition the bank insists on. European Union leaders will meet in a two-day summit in Brussels next week.
The IMF on Oct. 9 lowered its global growth forecasts for this year and next, predicting the world economy will grow 3.3 percent in 2012, the slowest since the 2009 recession, and 3.6 percent in 2013. The Washington-based lender now sees “alarmingly high” risks of a steeper slowdown.
The Thomson Reuters/University of Michigan preliminary October consumer sentiment index increased to 83.1 from 78.3 the prior month, the highest level since September 2007. The gauge was projected to fall to 78, according to the median forecast of 71 economists surveyed by Bloomberg News.
The producer price index rose 1.1 percent after a 1.7 percent gain in August, the Labor Department reported today in Washington. A Bloomberg survey of 76 economists called for a 0.8 percent increase. Core producer inflation, which excludes volatile food and energy prices, held steady for the first time since October 2011.
Thirty-year bonds have returned 3.3 percent this year, compared with a 2.1 percent gain in the broader U.S. Treasuries market, according to Bank of America Merrill Lynch indexes.