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Treasury Yields Fall to Lowest in 2 Months on Fed-Buying Wagers

Oct. 17 (Bloomberg) -- Treasury 10-year note yields fell to the lowest level in two months on speculation the Federal Reserve will maintain its bond-buying program into next year after the government shutdown weighed on economic growth.

U.S. debt advanced the most in a month as consumer confidence dropped to a two-year low and a regional factory measure fell in October. Treasury bill rates dropped for a second day after lawmakers agreed on a plan to end the federal closure that started Oct. 1 and to raise the borrowing limit. Two regional Fed presidents speaking today backed continued stimulus, while a third called for tapering even amid fiscal “uncertainty.”

“The idea that the Fed would taper right now is risky at best,” Matthew Duch, a fund manager in Bethesda, Maryland, at Calvert Investments, which oversees more than $12 billion in assets, said in a telephone interview. “If you think negotiations are going to be easier from here, you are being naive. And that has kept the longer end of the Treasury market well bid.”

The benchmark 10-year yield fell seven basis points, or 0.07 percentage point, to 2.59 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. The 2.5 percent note due in August 2023 rose 5/8, or $6.25 per $1,000 face amount, to 99 7/32. The yield touched 2.58 percent, the lowest since Aug. 12, and dropped as much as eight basis points, the most since Sept. 18.

Treasuries have lost investors 2.5 percent this year, according to Bloomberg US Treasury Bond Index. The Bloomberg Global Developed Sovereign Bond Index has lost investors 3.71 percent in 2013.

Record Low

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, dropped by 3.6 percent to $372 billion, from $385 billion yesterday. The average this year is $316 billion.

The overnight Treasury general collateral repo rate closed at 0.19 percent, down from a close of 0.35 percent yesterday, according to ICAP Plc, the world’s largest inter-dealer broker.

The seven-day relative strength index for the Treasury 10-year note yield was at 34 today, down from 47 yesterday and 67 on Oct. 15, according to Bloomberg data. A reading lower than 30 or above 70 suggests the security may be poised for a change in direction.

While the yield has advanced from a record low of 1.379 percent in July 2012, it’s below the average of about 6.40 percent since September 1981, the start of the three-decade bull market in bonds.

‘One Theme’

President Barack Obama just after midnight signed into law a measure to extend the nation’s borrowing authority into early 2014 and end the shutdown.

The deal, which avoided a default of the world’s biggest economy and means that federal workers return to their jobs today, funds the government at Republican-backed spending levels through Jan. 15, 2014, and suspends the debt limit through Feb. 7.

“There’s one theme out there -- it’s overwhelmingly negative for the economy and positive for the Fed not tapering, which people are equating to higher Treasury prices,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc.

In September, most Fed policy makers said the central bank will probably reduce bond purchases -- used to support the economy by putting downward pressure on borrowing costs -- this year from the current rate of $85 billion a month.

Fed Views

Fed Bank of Chicago President Charles Evans, a consistent advocate of pressing on with stimulus, said the central bank should postpone tapering after the shutdown stopped the flow of economic reports used to gauge growth.

“Only the data can tell us how much progress we’ve made, and they aren’t saying much right now,” he said today in a speech prepared for delivery in Madison, Wisconsin.

Fed Bank of Kansas City President Esther George, who has voted this year against expanding stimulus, said at a presentation in Oklahoma City that the Fed has enough data to assess the economy’s strength and should start tapering.

Fed Bank of Minneapolis President Narayana Kocherlakota speaking in Butte, Montana, said the Fed should do “whatever it takes” to push for a return to full employment, even at the risk of temporarily pushing inflation above the bank’s 2 percent target.

Evans and George are voting members of the Federal Open Market Committee; Kocherlakota isn’t.

Confidence Plunges

Treasuries remained higher as the monthly Bloomberg Consumer Confidence Index expectations gauge plunged to minus 31, the lowest level since November 2011, from minus 9 in September, a report showed today. The share of people projecting the economy will worsen jumped by the most since the collapse of Lehman Brothers Holdings Inc. five years ago.

The Federal Reserve Bank of Philadelphia’s general economic index fell to 19.8 this month from 22.3 in September. Readings greater than zero signal growth in the area, which covers eastern Pennsylvania, southern New Jersey and Delaware. The median forecast of 56 economists surveyed by Bloomberg called for a reading of 15.

Rates on $120 billion of bills maturing today, when U.S. borrowing authority was scheduled to lapse, dropped to 0.038 percent yesterday. They were as high as 0.51 percent Oct. 10.

The next securities due are $93 billion of debt maturing on Oct. 24. Rates on those bills touched 0.68 percent yesterday before dropping by 19 basis points to zero today. The rate was negative as recently as Sept. 27.

‘Buying Opportunities’

“There were buying opportunities in the bills market,” said Paul Montaquila, fixed-income investment officer with BNP Paribas SA’s Bank of the West. “It was a crazy ride. The bills market has returned to normalcy. The dust has settled.”

One-month rates were 12 basis points lower at 0.02 percent after touching 0.45 percent yesterday, the highest level since October 2008, according to data compiled by Bloomberg. The rate on bills due on Feb. 13 dropped three basis points to 0.06 percent, compared with an average of 0.035 percent since the securities were issued in August.

Even at the height of concern about a default, yields remained lower than historical levels, with one-month rates averaging 1.5 percent in the past 10 years. During that time they climbed to a high of 5.26 percent in November 2006 and fell to as low as negative 0.09 percent in December 2008.

The U.S. announced today it will sell $7 billion in 30-year Treasury Inflation Protected Securities on Oct. 24. The Treasury previously sold an equal amount of the securities on June 20.

The Fed today purchased $3.15 billion in Treasuries maturing between August 2021 and August 2023 as part of its program to lower borrowing costs.

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net

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

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