Treasuries Trade in Tightest Range in 2 Weeks as Fed Buys

Treasuries traded in the tightest range in two weeks as Federal Reserve efforts to depress long-term interest rates limited a rise in yields even after a report showed September retail sales beat forecasts.

Yields on the benchmark 10-year note, which increased for the first time in five days, pared advances after the Fed bought $5 billion of Treasuries maturing from October 2018 and August 2020 in an effort to reduce borrowing costs and counter recession risks. U.S. government debt rose earlier after Bank of Israel Governor Stanley Fischer said the world is “awfully close” to recession, as he backed the Fed’s increase in bond purchases.

“The market is trading as if it refuses to fight the Fed,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “While we had a better-then-expected retails sales report, the market seemed unable to find any directional bias. Volumes were on the light side.”

The benchmark 10-year note yield rose one basis point, or 0.01 percentage point, to 1.66 percent at 5 p.m. New York time, after dropping nine basis points last week, according to Bloomberg Bond Trader prices. The yield traded within a range of four basis points, the least since Oct. 1 and the seventh tightest this year. The 1.625 percent security due in August 2022 fell 2/32, or 63 cents $1,000 face value, to 99 21/32.

Retail sales in the U.S. rose 1.1 percent last month after a revised 1.2 percent increase in August that was the biggest since October 2010 and larger than previously reported, Commerce Department figures showed today in Washington. The median forecast of 77 economists surveyed by Bloomberg called for a 0.8 percent rise.

Fed Buying

“The data is across-the-board better than expected,” said Steven Ricchiuto, chief economist in New York at Mizuho Securities USA, Inc., one of 21 primary dealers that trade Treasuries with the Fed. “We’ve been in the same trading range for the last couple of weeks. We’ll remain in the same trading range, 1.65 percent to 1.75 percent.”

The Fed purchased Treasuries 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.

The Fed announced Sept. 13 it will keep its main interest rate at almost zero until at least mid-2015 and buy $40 billion of mortgage debt every month under its quantitative-easing program in an effort to stimulate economic growth and create jobs. The U.S. unemployment rate unexpectedly fell to 7.8 percent last month.

Volatility, Volume

The so-called break-even rate, which measures how much traders anticipate consumer prices will rise over the life of the debt, for 30-year securities was 2.44 percentage points after touching 2.42 percentage points on Oct. 12, the lowest since Oct. 1.

Volatility reached 63 basis points as of 4:40 p.m. in New York, below this year’s average of 72.6 basis points. Bank of America Merrill Lynch’s MOVE index, which measures price swings based on options, touched 57.5 basis points on Sept. 19, the least since May 7. The average over the past decade is 102.1 basis points.

Treasury volume reported by ICAP Plc, the largest inter-dealer broker of U.S. government debt, dropped to $175 billion in New York, from $195 billion on Oct. 12. It has averaged $242 billion in 2012. It touched a high this year of $464 billion in September.

The U.S. will sell $7 billion in 30-year Treasury Inflation Protected Securities on Oct. 18. At the previous auction of the debt on June 21, the U.S. sold $7 billion of the securities at a record low yield of 0.520 percent.

‘Pretty Slow’

Treasuries declined as Fischer said in an interview in Tokyo with Bloomberg Television airing today that, while there has been “a lot of progress made” to improve the global economy, its impact hasn’t materialized.

“It’s pretty slow right now,” he said. “Europe is technically in a recession, the U.S. is predicting less than 2 percent growth for the next few months.”

The 10-year term premium, a model created by economists at the Fed that includes expectations for interest rates, growth and inflation, was negative 0.89 percent today, the least expensive since Oct. 8. 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.

Debt Demand

Yields indicate growing demand for debt outside the Treasury market.

The difference between two-year interest-rate swaps and same-maturity Treasury yields narrowed to as little as 10.5 basis points on Oct. 12, the least since March 2010.

Investors use swaps to exchange fixed and floating interest-rate obligations. The spread between the fixed component and the Treasury rate narrows as demand for higher-yielding assets increases.

“The market is waiting for November,” said Justin Lederer, an interest-rate strategist at primary dealer Cantor Fitzgerald LP in New York. “We expect volatility to pick up. We’ll see how the elections work out -- investors will be a little bit more focused.”

The idea that Democrats are big spenders and bad for bonds while Republicans are deficit hawks is being turned on its head in the $10.8 trillion market for U.S. Treasury securities.

Johnson, Goldwater

Ever since Lyndon B. Johnson defeated Barry Goldwater for the presidency in 1964, yields on 10-year Treasuries have dropped about 40 basis points in the first month when a Democrat wins, and risen 19 after a Republican victory, according to data compiled by Bloomberg. When applied to the $264 billion in 10-year notes issued in fiscal 2012, the difference means $15.6 billion in interest costs over the life of the debt.

This year’s race for the White House between President Barack Obama and Republican challenger Mitt Romney comes as the U.S. faces $1.2 trillion in mandated spending cuts and tax increases starting Jan. 1 if Congress can’t agree to reduce the deficit, which totaled $1.09 trillion in fiscal 2012.

Economic output would shrink by 0.5 percent next year, and joblessness climb to about 9 percent if the so-called fiscal cliff isn’t averted, the Congressional Budget Office said.

“It’s the natural expectation that Democrats would be less business-friendly and less positive” for equities, Brett Rose, an interest-rate strategist at Citigroup Inc. in New York who has researched elections and their impact on bonds, said in a telephone interview Oct. 9.

That’s “consistent with yields going lower. Republicans are more business-friendly, which leads to higher equity prices and higher Treasury yields,” he said.

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