Treasuries Fall as Bernanke Stimulus Defense Damps Refuge DemandCordell Eddings and Daniel Kruger
Treasury 10-year notes fell for a second day as Federal Reserve Chairman Ben S. Bernanke stoked speculation the central bank’s monetary stimulus would bolster economic growth, diminishing the desire for safety.
Benchmark notes were still headed for the first monthly gain since November as Bernanke said in congressional testimony the central bank’s bond buying won’t lead to asset price bubbles or inflation. U.S. debt was also supported by month-end buying to match market indexes. Treasury auctioned $29 billion of seven-year securities, completing its sales this week of $99 billion of notes.
“We’ve had a strong run this week, and we are just taking a breather and giving some of that back with stocks getting a big boost,” said William O’Donnell, head U.S. government-bond strategist at RBS Securities Inc. in Stamford, Connecticut, one of 21 primary dealers that trade with the Fed. “What is driving the market these days is the dovishness from the Fed chairman. Stocks and bonds have loved it.”
The benchmark 10-year yield rose two basis points, or 0.02 percentage point, to 1.90 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. The 2 percent note due February 2023 fell 6/32, or $1.88 per $1,000 face amount, to 100 7/8.
The yield fell as much as four basis points and it reached 1.84 percent yesterday, the least since Jan. 24. The yield has dropped nine basis points since Jan. 31.
The Standard & Poor’s 500 Index of stocks rose 1.3 percent.
“Bernanke has damped expectations or fears that had been drummed up about an easing of the pace of asset purchases, which is providing a floor under Treasuries,” Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York, said in a telephone interview. “We have an equilibrium level for rates over the short term after being whipped around this week.”
The central bank is buying $85 billion of Treasury and mortgage bonds a month to put downward pressure on interest rates. The Fed purchased $5 billion of Treasuries maturing from February 2017 to November 2017 today.
Treasury trading volume was $399 billion yesterday, down from $401.6 billion on Feb. 25, the highest level since Feb. 1, according to ICAP Plc, the largest inter-dealer broker of U.S. government debt. Daily volume has averaged $294 billion this year, compared with $240 billion in 2012.
Total daily volume for Treasury futures reached a record 10.1 million contracts on Feb. 26, topping the previous mark of 8.9 million set on May 29, 2012, the Chicago-based CME Group said today in a statement.
Volume jumped on volatility produced by “the continued flight to quality of U.S. sovereign debt and the positive economic news coming out this week,” said Derek Sammann, CME’s Senior Managing Director of Financial Products and Services.
Funds that manage portfolios against benchmark indexes, including the Barclays U.S. Aggregate Index, typically buy longer-maturity Treasuries near month-end to align the interest-rate sensitivity of their holdings with the indexes. The Barclays index, which many funds use to measure their performance, will extend its duration, the measure of rate-sensitivity, by 0.11 year on March 1.
“Any kind of mutual fund who’s benchmarked to the index is generally going to have to react to the change in the benchmark just to stay where they are,” said Donald Ellenberger, who oversees about $10 billion as co-head of government and mortgage-backed securities at Federated Investors in Pittsburgh. “The index extension is a pretty big deal.”
The 10-year term premium, a model that includes expectations for interest rates, growth and inflation, reached minus 0.73 percent yesterday, the most costly level since Jan. 24. A negative reading indicates investors are willing to accept yields below what’s considered fair value.
The seven-year securities drew a yield of 1.260 percent, versus an average forecast of 1.262 percent in a Bloomberg News survey of eight of the Fed’s primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with amount of securities offered, was 2.65, compared with 2.60 last month and an average of 2.70 at the past 10 sales.
“Even though the seven-year is at expensive levels, it came down as there is demand in front of month-end extension,” said Scott Graham, head of government-bond trading at Bank of Montreal’s BMO Capital Markets unit in Chicago, a primary dealer. “The bond market is staying near these levels as the equity market continues to get dislocated from where they should be.”
Indirect bidders, an investor class that includes foreign central banks, purchased 33.4 percent of the notes, compared with an average of 39.8 percent at the past 10 sales.
Direct bidders, non-primary dealer investors that place their bids directly with the Treasury, purchased 18.2 percent of the notes, compared with the 10-auction average of 16.2 percent.
Seven-year notes have lost 0.1 percent this year, compared with a 0.3 percent decline by Treasuries overall, according to Bank of America Merrill Lynch indexes. The seven-year securities returned 3.9 percent in 2012, while Treasuries overall advanced 2.2 percent.
The government sold $35 billion in five-year securities yesterday at a yield of 0.777 percent. The Feb. 25 auction of $35 billion in two-year debt drew a yield of 0.257 percent.