Treasuries Drop Before Fed Ends Policy Meeting, Europe Debt Crisis Summit
Treasuries dropped, snapping a three- day gain, before the Federal Reserve ends its two-day policy meeting amid speculation it may consider additional large-scale asset purchases.
A private report showed stronger-than-forecast jobs growth as the Fed reviews economic conditions. Longer-maturity debt led losses earlier as European leaders prepared to hold talks in France to tell Greece there is no alternative to the budget cuts imposed in its bailout plan. Treasury announced it will sell $72 billion in three-, 10- and 30-year debt next week.
“The market is in a wait-and-see mode for the Fed,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “All eyes continue to be on the European situation. We are trading in a tight range.”
The yield on the 10-year note rose four basis points, or 0.04 percentage point, to 2.03 percent at 10:49 a.m. in New York, according to Bloomberg Bond Trader prices. The price of the 2.125 percent note maturing in August 2021 fell 12/32, or $3.75 per $1,000 face amount, to 100 26/32. The rate dropped to 1.95 percent yesterday, the lowest level since Oct. 6.
Volatility in the Treasury market has picked up. Merrill Lynch & Co.’s MOVE index, which measure price swings in Treasuries based on prices of over-the-counter options maturing in two to 30 years, rose to 116 yesterday, close to this year’s high of 117.8 reached on Aug. 8. It touched the year’s low of 71.5 on May 31.
The difference between two- and 10-year yields widened for the first time in four days, expanding seven basis points to 181 basis points. The spread shrank to 172 basis points yesterday, the narrowest since Oct. 7.
Fed officials are probably engineering a third round of large-scale asset purchases to boost the economy, while they are unlikely to announce a decision today, according to a Bloomberg News survey.
Sixty-nine percent of the economists surveyed say Chairman Ben S. Bernanke will embark on a third round of quantitative easing with a 36 percent predicting the move in the first quarter of next year, according to the poll of 42 economists from Oct. 26-31. Bernanke will hold a press conference beginning at 2:15 p.m.
Fed officials are weighing further easing even after economic growth last quarter accelerated to the fastest pace in a year. Vice Chairman Janet Yellen and Chicago Fed President Charles Evans said in speeches last month that more action may be needed to reduce an unemployment rate stuck around 9 percent or higher for 30 months.
“We’ll be playing close attention to the Fed,” said Jim Vogel, interest rate strategist at FTN Financial in Memphis, Tennessee. “We know what the market thinks about Europe, but the last official word from the Fed about Europe was a grim outlook. Now it looks like the Fed may have been right.”
A Labor Department report on Nov. 4 is forecast to show the U.S. added 95,000 jobs, according to 84 economists in a separate survey, compared with 103,000 the previous month.
The unemployment rate is forecast to remain at 9.1 percent from the previous month, economists said before the Labor Department reports the figures that day.
Companies added workers in October, easing concern the job market is stagnating in the third year of the U.S. recovery, according to a private report based on payrolls.
The 110,000 increased followed a revised 116,000 gain the prior month, Roseland, New Jersey-based ADP Employer Services said today. The median forecast of economists surveyed by Bloomberg News called for a advance of 100,000.
“ADP was marginally stronger than expected and added to the bearish sentiment,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “We saw stability in global equities, which has given pause to the market’s rally.”
Greek Prime Minister George Papandreou was summoned to Cannes on the eve of a Group of 20 summit where he will hear from French President Nicolas Sarkozy that the “only way to resolve Greek debt problems” is through a deal hammered out last week in crisis meetings.
Treasuries rallied earlier this week as demand for safety soared after Papandreou called a referendum and a parliamentary confidence vote, fueling concern the country will be pushed into default if voters reject it. Thirty-year yields slid 46 basis points during the rally, the biggest three-day drop since credit markets froze in November 2008.
“A part of the bullish motivation was the idea that now Greece has to approve the bailout plan,” said CRT’s Lyngen. “It’s not a done deal by any means.”
The Treasury announced it will sell $32 billion of three- year notes on Nov. 8, $24 billion of 10-year debt on the following day and $16 billion of 30-year bonds on Nov. 10. The amounts of the auctions are unchanged from an August grouping of the same maturities.
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