Treasuries Advance After Fed Minutes Show Officials Saw Risks to Recovery
Treasuries gained, pushing two-year note yields to almost a record low, after minutes of the Federal Reserve’s June meeting showed policy makers noted that risks to the recovery increased.
Ten-year yields fell for the first time in six days as the minutes showed some Fed officials saw “some risk of deflation.” Treasuries also rose after the U.S. sold $13 billion of bonds at a lower-than-forecast yield and data showed retail sales dropped in June more than forecast.
“The Fed is on record talking about deflation, which they haven’t in some time,” said Thomas Tucci, head of U.S. government bond trading in New York at Royal Bank of Canada, one of the 18 primary dealers required to bid in U.S. debt auctions. “When the Fed starts to identify things by name, that means it is seriously on their minds -- and this is helping the market.”
The yield on the 30-year bond dropped 7 basis points, or 0.07 percentage point, to 4.04 percent at 4:30 p.m. in New York, according to BGCantor Market Data. The two-year yield touched 0.5928 percent, nearing the all-time low of 0.5856 percent set on June 30. The yield on the benchmark 10-year note tumbled 8 basis points to 3.05 percent.
Fed officials at their June 22-23 policy meeting saw no need to boost stimulus to the economy, while trimming their forecasts for growth, meeting minutes released today showed.
“The economic outlook had softened somewhat and a number of members saw the risks to the outlook as having shifted to the downside,” the minutes said. “A few participants cited some risk of deflation,” they said.
Shifts in the outlook were seen as “relatively modest” and didn’t warrant new efforts to spur the economy, according to the minutes.
The Fed lowered its central tendency forecast for 2010 growth to a range of 3 percent to 3.5 percent versus 3.2 percent to 3.7 percent in April, the minutes show. It trimmed its outlook for inflation this year to a range of 1 percent to 1.1 percent, down from 1.2 percent to 1.5 percent in April.
“The Fed is on hold longer than the market expects, but the market is now coming to that realization,” said William Cunningham, head of fixed-income and credit research at State Street Corp. in Boston. “After the backup in rates, higher rates are bringing in some buyers to the Treasury market.”
The 30-year bond sale drew a yield of 4.08 percent, the lowest since October, compared with an average forecast of 4.108 percent in a Bloomberg News survey of 8 primary dealers. The last sale of long bonds, on June 10, drew a yield of 4.182 percent, also below the 4.009 percent at the October auction.
The bid-to-cover ratio, which gauges demand by comparing total bids with the amount offered, was 2.89, versus 2.87 at the previous sale and an average for the past 10 offerings of 2.61. Indirect bidders, an investor class that includes foreign central banks, purchased 37.4 percent of the notes, compared with an average of 36.4 percent for the past 10 sales.
Direct bidders, non-primary-dealer investors who place their bids directly with the Treasury, bought 16.1 percent, versus an average of 15.6 percent for the past 10 sales.
The more-than-fourfold increase in direct bids by investors at Treasury auctions in the past year probably won’t persist, according to Citigroup Inc. Direct bids rose to 21 percent from less than 5 percent, it said.
“The change in bidding behavior should increase the volatility around auctions,” Joe Leary and Brett Rose, New York-based strategists at the firm, wrote in a report today. “A counter effect that comes along with an increased number of direct bidders is increased competition. This recent change in auction behavior may not be completely adverse for Treasury borrowing costs.”
U.S. retail sales decreased 0.5 percent last month after a revised 1.1 percent drop in May, Commerce Department data showed. The median forecast in a Bloomberg News survey of economists was for a decline of 0.3 percent.
The U.S. consumer-price index fell 0.1 percent in June, a third monthly decline, according to a Bloomberg survey before the Labor Department reports the figure on July 16. Excluding food and energy, prices probably increased 0.9 percent from a year earlier, matching the smallest year-over-year gain since 1966, a separate Bloomberg survey showed.
Yields on 10-year notes will advance to 3.35 percent by year-end, according to a Bloomberg survey of banks and securities companies with the most recent forecasts given the heaviest weightings. They touched 2.8793 percent on July 1, the lowest level since April 2009, amid concern European efforts to cut government spending would hurt the recovery.
Ten-year notes fell for a fifth day yesterday, the longest since August, as the U.S. sold $21 billion of the securities and stocks rallied around the world, damping demand for the safest assets. The auction drew a 3.119 percent yield, compared with a forecast of 3.109 percent in a Bloomberg survey. The Treasury sold $35 billion in three-year debt on July 12.