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U.S. 10-Year Yields Trade Close to One-Week Low With Fed

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PIMCO Co-chief Bill Gross
Bill Gross, co-chief investment officer of Pacific Investment Management Co. (PIMCO), reiterated his concern that central bank efforts to spur growth will boost costs in the economy, saying inflation may quicken to 3 percent over the next few years. Photographer: Andrew Harrer/Bloomberg

Feb. 22 (Bloomberg) -- Treasury 10-year yields traded at almost a one-week low on speculation the Federal Reserve’s asset purchases may support bond prices.

Benchmark notes rose for a third day as several policy makers said at the Fed’s last meeting that officials should be ready to vary the pace of its $85 billion in monthly bond purchases. Primary dealers borrowed the most Treasuries from the Fed yesterday in almost a year amid speculation they sought to unwind bets that debt prices would fall. Refuge demand was supported as the euro-area economy will shrink in back-to-back years for the first time, the European Commission said.

“We’ve seen pressure to move rates lower,” said Tom Kersting, a fixed-income strategist at Edward Jones & Co. in St. Louis. The Fed’s statement “was probably the primary driver for what we’ve seen in the Treasury market.”

The U.S. 10-year yield fell two basis points, or 0.02 percentage point, to 1.96 percent at 5 p.m. New York time, according to Bloomberg Bond Trader data. The price of the 2 percent note due in February 2023 rose 1/8 or $1.25 per $1,000 face value to 100 11/32. The yield fell yesterday to the lowest since Feb. 12.

Fed Demand

The Fed bought $1.4 billion of Treasuries maturing from February 2037 to August of 2042 today as part of its plan to bolster the economy.

Lending of U.S. notes and bonds in the central bank’s daily program rose to $21.57 billion, an increase of 10 percent from the Feb. 20 level and the highest borrowing by dealers since March 2012. Total Treasuries lending rose to $22.28 billion, also the highest since March, according to data on the New York Fed’s website.

Treasuries rallied Feb. 20 after the central bank released minutes of its policy-making committee meeting Jan. 29-30 that showed continued debate about how long to undertake open-ended bond buying to bolster the economy. Minutes from the Dec. 12 meeting, released Jan. 3, had fueled short position, or wagers that Treasuries would fall, on speculation the central bank may curtail monetary stimulus sooner that forecast.

“What you have is a little speculation entering the market, and the sense is they don’t know which way the Fed is going to go,” said Michael Franzese, senior vice president of fixed-income trading at ED&F Man Capital Markets in New York.

Central Bank

Fed Chairman Ben S. Bernanke minimized the view that the central bank’s monetary stimulus has spawned economically risky asset bubbles in comments at a meeting with dealers and investors this month, according to three people with knowledge of the discussions. The people, who asked not to be identified because the talks were private, said Bernanke made the remarks at a meeting in early February with the Treasury Borrowing Advisory Committee.

Among the concerns raised during the meeting, according to one person, were rising farmland prices and the growth of mortgage real estate investment trusts. Falling yields on speculative-grade bonds also were mentioned as a potential concern, two people said.

The Fed holds a record $2.75 trillion of Treasuries and mortgage securities, up from $2.5 trillion in September before policy makers announced the central bank would buy $40 billion a month of securities backed by home loans, which was followed by a December pledge to buy $45 billion a month of government debt.

Market Views

Hedge-fund managers and other large speculators reduced net-short position in 30-year bond futures in the week ending Feb. 19, according to U.S. Commodity Futures Trading Commission data. Speculative short positions, or bets prices will fall, outnumbered long positions by 17,695 contracts on the Chicago Board of Trade, down 5,984 contracts, or 25 percent, from a week earlier.

Traders increased their net-long position in 10-year note futures. Speculative long positions, or bets prices will rise, exceeded short positions by 53,288 contracts.

The Commerce Department will revise its estimate of gross domestic product in the fourth quarter to 0.5 percent growth from a 0.1 percent contraction, according to a Bloomberg survey of economists before the report on Feb. 28. Orders for durable goods fell in January for the first time since August, a separate report will show Feb. 27, analysts estimate.

The euro-area economy will shrink in back-to-back years for the first time, driving unemployment higher as governments, consumers and companies curb spending, the European Commission said.

Gross domestic product in the 17-nation region will fall 0.3 percent this year, compared with a November prediction of 0.1 percent growth, the Brussels-based commission forecast today. Unemployment will climb to 12.2 percent, up from the previous estimate of 11.8 percent and 11.4 percent last year.

The Treasury is scheduled to sell $35 billion of two-year notes on Feb. 25, the same amount of five-year securities the next day and $29 billion of seven-year securities on Feb. 27.

The 10-year note will yield 2 percent at the end of June and 2.3 percent by Dec. 31, according to the weighted average forecast of economists in a Bloomberg survey.

To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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