Treasury 10-year notes gained for a second day as investors sought the safest assets on speculation a disagreement among U.S. political leaders over the nation’s debt ceiling will derail the economy.
Yields on the benchmark note touched a one-week low before President Barack Obama warned “markets could go haywire” if the debt limit isn’t raised. Republican leaders responded by calling for spending cuts. U.S. government debt extended gains after Federal Reserve Chairman Ben S. Bernanke said the benefits of quantitative easing may vary through time and the central bank is continuing to monitor the impact of its bond purchases. The central bank purchased $1.47 billion of Treasuries in the first of daily buybacks this week.
“The debt-ceiling agreement will also weigh down economic growth,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “We could continue to move higher from here.”
The 10-year yield dropped two basis points, or 0.02 percentage point, to 1.84 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. The yield earlier touched 1.83 percent, the lowest level since Jan. 3. The 1.625 percent note due in November 2022 rose 6/32, or $1.88 per $1,000 face amount, to 98 1/32. Thirty-year bond yields fell two basis points to 3.03 percent.
The U.S. reached the statutory limit of $16.4 trillion on Dec. 31, and the Treasury began using extraordinary measures to finance the government. It will exhaust that avenue as soon as the middle of February, according to the Congressional Office.
Republican lawmakers “will not collect a ransom” if they delay increasing federal borrowing authority, Obama said. “There are no magic tricks here. There are no loopholes. There are no easy outs.”
House Speaker John Boehner, an Ohio Republican, said in a statement that voters “do not support raising the debt ceiling without reducing government spending at the same time.” Senate Republican leader Mitch McConnell said the debt ceiling debate is the “perfect time” to address spending.
Treasuries also rallied as economists said U.S. reports tomorrow will show retail sales rose at a slower pace in December and producer prices declined from the previous month.
Inflation may at times run modestly above the Fed’s 2 percent target, Fed Bank of Chicago President Charles Evans said today in Hong Kong.
“The Fed is still the main driver of Treasuries,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “We should see Treasuries continue to grind lower in yield.”
The difference between yields on 10-year notes and similar-maturity TIPS, a gauge of expectations for consumer prices over the life of the debt, was 2.53 percentage points. The average over the past decade is 2.19 percentage points.
The Fed purchased Treasuries maturing from February 2036 to November 2042 as part of the $85 billion of government and mortgage debt it is buying each month to spur the economy by putting downward pressure on interest rates.
Policy makers on the Federal Open Market Committee are debating how long to push forward with this third round of bond purchases, which for the first time are linked to unemployment and inflation levels.
Bernanke said he isn’t aware of any new stimulus tool for the central bank to use to try to boost growth. “As far as I’m aware, there’s no completely new method that we haven’t” already tapped, Bernanke said today in Ann Arbor, Michigan.
Federal Reserve Bank of San Francisco President John Williams said earlier that the Fed will need to keep buying assets “well into” the second half of the year to combat unemployment.
Fed Bank of Atlanta President Dennis Lockhart said that, while he’s supported the central bank’s open-ended bond purchases so far, further expansion of a record stimulus could complicate the eventual shrinking of the balance sheet.
“Open-ended does not mean without bound,” Lockhart said in a speech in Atlanta. “I do think the growth of the Fed’s balance sheet could have longer-term consequences that are worrisome.”
U.S. government debt rose earlier as a Bloomberg News report that Japanese Prime Minister Shinzo Abe may consider a fund to buy as much as 50 trillion yen ($558 billion) of foreign securities drove the yen to the weakest level versus the dollar in 2 1/2 years.
Investors are betting Abe, who has called for raising the nation’s inflation goal to 2 percent from 1 percent, will select a central bank chief who will expand monetary easing, accelerating the currency’s decline.