Treasuries Rise Most in Year on Bets Stimulus to Continue
Treasuries rallied the most in more than a year after Federal Reserve Chairman Ben S. Bernanke soothed investor concern the central bank is close to ending its bond-buying program by saying stimulus will remain accommodative.
Thirty-year bond yields fell the most on a weekly basis since April as bidding at this week’s U.S. Treasury debt auctions suggested that the exodus from government bonds triggered last month by the Fed’s outlining of an ending to quantitative easing is slowing. U.S. 10-year yields climbed 36 basis points in June when Bernanke said the Fed was prepared to start tapering this year if the economy improved. He delivers his semi-annual monetary policy report to Congress next week.
“Bernanke went out of his way to comfort and convince the markets that a reduction in QE is by no means to be regarded as a financial tightening,” said Christopher Sullivan, who oversees $2.1 billion as chief investment officer at United Nations Federal Credit Union in New York. “There remains some uncertainty, but the market has been reassured for now that easing remains highly conditional.”
The U.S. 10-year yield fell 16 basis points, or 0.16 percentage points, to 2.58 percent on the week, according to Bloomberg Bond Trader prices. It was the biggest five-day drop since the period ended June 1, 2012. The 1.75 percent note due May 2023 rose 1 9/32, or $12.81 per $1,000 face amount, to 92 25/32.
Yields on 30-year bonds dropped nine basis points on the week to 3.63 percent, the biggest five-day drop since the period ending April 5.
Treasuries also rose as investors fled Portuguese 10-year bonds amid a parliamentary debate about the state of the nation that added to concern the euro region’s sovereign-debt crisis may be flaring up again. President Anibal Cavaco Silva said on July 9 that early elections were undesirable and urged the ruling coalition parties and the main opposition to reach a “national salvation” pact allowing Portugal to complete its aid program.
Treasuries remained higher yesterday after France’s credit ranking was cut by one step to AA+ from AAA, Fitch said, joining Moody’s Investors Service and Standard & Poor’s in removing France from the shrinking club of top-rated governments. The outlook is stable.
“There’s pressure on Portugal, which is significantly higher in yields,” said Dan Mulholland, head of Treasury trading at BNY Mellon Capital Markets in New York. As for the downgrade, “especially on a Friday, it catches people’s attention.”
Treasuries due in a decade or more are at almost the cheapest level in more than two years relative to global peers with comparable maturities, according to Bank of America Merrill Lynch indexes. Yields on U.S. debt were 81 basis points higher than those in an index of other sovereign debt on July 11. The yields were 86 basis points higher on July 10, the most since March 2011.
Hedge-fund managers and other large speculators increased their net-short position in 10-year note futures to the most since March in the week ending July 9, according to U.S. Commodity Futures Trading Commission data. Speculative short positions, or bets prices will fall, outnumbered long positions by 47,110 contracts on the Chicago Board of Trade. Net-short positions rose by 24,193 contracts, or 106 percent, from a week earlier.
Investors bid an average of $2.89 for each $1 of the $66 billion in three-, 10- and 30-year securities auctioned over three days starting July 9. The bid-to-cover ratio was 2.71 for $99 billion of two-, five- and seven-year notes sold in the three days ended June 27, the first auctions to follow Bernanke’s June 19 comments on tapering.
The U.S. Treasury Department asked the 21 primary dealers that trade government debt directly with the Fed to discuss supply-and-demand dynamics in the market for Treasury Inflation-Protected Securities. They will meet July 25-26, after the U.S. sells $15 billion in 10-year TIPS on July 18.
TIPS are the worst-performing part of the U.S. government debt market this year, with securities due in 10 years and longer falling 15 percent, according to Bank of America Merrill Lynch indexes. Ten-year notes fell 5.6 percent, the data show.
Bernanke told reporters on June 19 the Fed may begin to slow its $85 billion in monthly bond purchases this year and end them in 2014 if economic growth meets policy makers’ goals. The purchases have increased the Fed’s balance sheet to a record $3.5 trillion.
Treasuries erased gains yesterday after Fed Bank of Philadelphia President Charles Plosser, who has opposed the Fed’s current round of asset purchases, said the central bank should begin reducing its monthly bond buying in September and end the stimulus by year-end.
“The U.S. bond market has been able to find some support as markets are significantly cheaper than they were two months ago and the Fed has been able to arrest the rise in yield,” Donald Ellenberger, who oversees about $10 billion as co-head of government and mortgage-backed securities at Federated Investors in Pittsburgh, said in a telephone interview. “It’s clear the Fed has rung the bell and the beginning of the end of easing is upon us, but it’s still a little ways down the road.”
Thirty-day federal funds futures contracts for delivery in May 2015 yielded 0.55 percent, indicating investors expect the Fed target to be higher by then. As recently as July 5, the securities for delivery in February 2015 were indicating an increase in the Fed target. The contract settles at the average overnight fed funds rate for the delivery month.
The Fed has kept its target for overnight bank lending in a range of zero to 0.25 percent since December 2008. It has said it will consider raising the target when the unemployment rate falls to 6.5 percent, versus 7.6 percent as of June.
Even with the week’s rally, Treasury 10-year notes are signaling further weakness, according to Bank of America Corp. citing technical analysis.
A 10-year yield break above 2.62 percent will signal a rise to as high as 2.95 percent, according to MacNeil Curry, chief rates and currencies technical strategist in New York at Bank of America Merrill Lynch.
“We are still in a pretty decent bear trend,” Curry said in a telephone interview. “We’ve taken a pause, but the momentum points to higher yields.”
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