Treasuries Advance After Fed Maintains Stimulus, Cites Inflation

Treasuries Pare Loss as Fed Says Tapering Still Data-Dependent
The Marriner S. Eccles Federal Reserve building stands in Washington, D.C. Photographer: Brendan Smialowski/Bloomberg

Treasuries rallied, reversing earlier losses, after the Federal Reserve failed to indicate when it will reduce the pace of the $85 billion a month in monetary accommodation it has used to buy bonds since January.

U.S. 30-year bond yields fell from an almost two-year high as policy makers led by Fed Chairman Ben S. Bernanke said persistently low inflation could hamper the expansion. Any slowdown in purchases remains linked to signals of sustained economic gains, the Fed said. Treasuries fell earlier as U.S. output grew 1.7 percent in the second quarter, the Commerce Department said, exceeding a 1 percent forecast. The unemployment rate dropped to 7.5 percent in July, according to the median forecast of 83 economists in a Bloomberg News survey before the Aug. 2 report.

“The lack of specific guidance is what is helping fuel demand in the Treasury market,” said Sean Simko, who oversees $8 billion in assets at SEI Investments Co. in Oaks, Pennsylvania. “The Fed has made the case that accommodation remains appropriate at this point.”

The benchmark 10-year yield fell three basis points or 0.03 percentage point, to 2.58 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. The price of the 1.75 percent note maturing in May 2023 rose 9/32 or $2.81 per $1,000 face value to 92 28/32. The yield had climbed as high as 2.70 percent earlier.

Thirty-year bond yields fell four basis points to 3.64 percent after reaching 3.74 percent, the most since Aug. 16, 2011.

Market Returns

U.S. government securities generated a loss of 0.2 percent in July and have declined 2.6 percent for the year, according to the Bloomberg U.S. Treasury Bond Index.

“The committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term,” the Federal Open Market Committee said today at the conclusion of a two-day meeting in Washington.

“The Fed has very little reason to be talking about tapering or tightening at this stage,” said Mark MacQueen, partner and money manager in Austin, Texas, at Sage Advisory Services Ltd., which oversees $10 billion. “The Fed’s discussion of inflation when everybody’s looking for a discussion of tapering is telling us something. It’s telling us that they continue to be worried about the economy slowing down, not overheating.”

Fed Outlook

The slowdown in purchases may happen as soon as at the central bank’s meeting on Sept. 17-18, according to a Bloomberg News survey of economists.

“Given the fact the GDP is still below stall speed, I think they want more evidence that we’re approaching 2.5, 3 percent trend growth versus the stall speed we’re currently at,” said Richard Schlanger, who helps invest $20 billion in fixed-income securities as vice president at Pioneer Investments in Boston. “They’ll wait until September or December” to lay out thinking at Bernanke’s post-statement press conference.”

The Treasury Department announced it plans to sell the first floating-rate notes in January and expects to gradually decrease coupon-auction sizes during the coming quarter as the nation’s fiscal health improves.

Floating Rates

Three months ago, the Treasury had said floating-rate sales may occur as early as the fourth quarter this year. The Treasury also said sales next week of notes and bonds will be unchanged from last quarter at $72 billion. The quarterly refunding, held in February, May, August and November, have remained at that level since November 2010.

“The Treasury is taking a very conservative and cautious approach as the improvement in fiscal situation has been somewhat questionable this year,” said Thomas Simons, a government-debt economist in New York at Jefferies LLC, one of the 21 primary dealers that are required to bid at government debt auctions. “The sustainability of the improvement we’ve seen is not entirely clear. So the Treasury doesn’t want to have to ramp up borrowing again after cutting it.”

The August auctions will allow refunding of $69.6 billion of securities maturing on Aug. 15 and raise $2.4 billion of new cash.

The ADP Research Institute said that employers added 200,000 jobs in July, compared with a forecast of 180,000 jobs in a Bloomberg News survey of economists.

The government’s jobs report will show the economy added 185,000 jobs for the month, according to the median forecast of a Bloomberg survey.

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