Treasuries Rise for Second Week Before Economy-Themed Election

Treasuries rose for a second week as Americans prepared to choose a president who will face unprecedented debt levels and the so-called fiscal cliff, which threaten to derail an economy hobbled by elevated unemployment.

Benchmark 10-year note yields traded close to a two-week low on concern Hurricane Sandy has disrupted business and will hinder the economic recovery. Pacific Investment Management Co.’s Bill Gross said the Federal Reserve will continue its monetary stimulus, even with the nation adding more jobs than forecast last month. The U.S. will sell $72 billion in notes and bonds next week.

“There is a lot of uncertainty in the market -- the election being a contributing factor -- and whoever wins will have their plate full of all of the things that have kept rates low,” said Jay Mueller, who manages about $2 billion of bonds at Wells Capital Management in Milwaukee. “The theme for next week will be politics, written large.”

The yield on 10-year notes fell three basis points, or 0.03 percentage point, this week to 1.72 percent in New York. It touched 1.68 percent, the least since Oct. 16. The 1.625 percent note due in August 2022 fell 9/32, or $2.81 per $1,000 face amount, to 98 6/32.

Thirty-year bond yields finished the week little changed at 2.91 percent.

Futures Bulls

Hedge-fund managers and other large speculators more than doubled their net-long position in 10-year note futures in the week ending Oct. 30, according to U.S. Commodity Futures Trading Commission data. Speculative long positions, or bets prices will rise, outnumbered short positions by 169,456 contracts, the most this year, on the Chicago Board of Trade. Net-long positions rose by 90,160 contracts, or 114 percent, from a week earlier.

Employment and the economy are central themes before the Nov. 6 election, with President Barack Obama and Republican nominee Mitt Romney each trying to convince voters he can best energize the economic expansion and create jobs. The fiscal cliff refers to the more than $600 billion of federal spending cuts and tax increases that will take effect at the start of next year unless Congress acts.

The unemployment rate rose to 7.9 percent in October, after dropping to 7.8 percent the previous month, the lowest since January 2009, as employers took on more part-time workers. The U.S. added 171,000 jobs in October, compared with a forecast of 125,000 and a revised 148,000 gain the previous month.

Vote Preview

“We’ll still bounce around and have some volatility,” said Steven Ricchiuto, said chief economist at Mizuho Securities USA Inc. in New York. “The next big thing for the bond market is the elections.”

Bond investors are better off during the Obama administration now than four years ago, Bank of America Merrill Lynch bond index data show.

From Treasuries to mortgage securities to corporate bonds, returns on U.S. fixed-income assets have averaged 6.6 percent throughout Obama’s term, exceeding the 4.6 percent during the previous four years under George W. Bush, according to Bank of America indexes. Yields on America’s fixed-income assets yield nine basis points less than the global average, compared with 51 basis points more back then, the data show.

U.S. government debt securities have returned 24.7 percent since the end of October 2008, including reinvested interest, or 5.7 percent a year, Bank of America Merrill Lynch’s U.S. Treasury Master Index shows. That compares with 21.6 percent for government debt worldwide, according to the firm’s indexes.

Vote Outcome

The question of the election is “did Obama do a good enough job, given the cards he was dealt, or will people focus on the fact that someone else could have done a better job,” said Scott Minerd, chief investment officer of Guggenheim Partners LLC, who oversees more than $125 billion from Santa Monica, California. “Regardless of who wins the election, the market will take it well. The market doesn’t like uncertainty, and just the removal of the uncertainty and knowing where we are going will be a positive.”

Trading volumes fell to a 10-month low Oct. 29 as the Securities Industry and Financial Markets Association recommended that dealing in dollar-denominated fixed-income securities end early that day. The bond market was closed on Oct. 30.

Sandy, the Atlantic’s largest-recorded tropical storm, slammed into the East Coast Oct. 29, emptying the streets of some of the nation’s largest cities and lashing a region of 60 million with gales and rain. The storm, 900 miles across, may cause as much as $50 billion in economic damage, according to Eqecat Inc., a risk-management company in Oakland, California.

’Screwy Week’

“You’ve had a screwy week of trading because of Sandy,” said Ward McCarthy, chief financial economist at Jefferies & Co. Inc. in New York, one of the 21 primary dealers that trade with the Fed. “Across the board, data has met or exceeded expectations, so the perception that the economy may be going in the tank here, the probability is reduced.”

The Federal Open Market Committee said on Oct. 24 it will continue buying $40 billion in mortgage-backed securities each month, aiming to reduce unemployment. It reiterated that it will probably keep its benchmark interest rate close to zero at least through the middle of 2015.

“The economy seems to be muddling along, which is encouraging,” said Chris Ahrens, an interest-rate strategist at UBS AG Stamford, Connecticut, a primary dealer. “But we’re not really getting the upside amplitude that would really help the president in his campaign, nor are we getting a downside trajectory that would give the contender something to beat the drum about. It’s kind of a draw, frankly.”

Debt Sales

Treasury will auction $32 billion in three-year debt on Nov. 6, $24 billion in 10-year securities Nov. 7 and $16 billion in 30-year bonds Nov. 8. The sales will raise $8.9 billion of new cash, as maturing securities total $63.1 billion.

The Department reiterated Oct. 31 it expects to reach the $16.4 trillion federal debt limit “near the end of 2012.” Treasury said it can use “extraordinary measures” to allow the government to continue to meet its obligations until early in 2013.

The Treasury also said an auction under its planned floating-rate note program is “estimated to be at least one year away.”

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