Treasuries Rise as Fed’s Dudley Says Bond Buys May Be Prolonged

Treasuries rose for a second day as Federal Reserve Bank of New York President William C. Dudley said the central bank may prolong its asset-purchase program if the economy’s performance fails to meet the Fed’s forecasts.

Bonds pared gains after the National Association of Realtors’ index of pending U.S. home sales jumped 6.7 percent to 112.3, the highest since December 2006. Treasuries maintained gains earlier after U.S. consumer spending rebounded and claims for jobless benefits fell. Pacific Investment Management Co.’s Bill Gross said 10-year yields may fall a quarter-percentage point. The U.S. will sell $29 billion of seven-year securities.

“The Fed is trying to steer the market a little bit away from thinking rates are going to go up” soon, said Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc. “They are on hold for a long period.”

The 10-year yield decreased three basis points, or 0.03 percentage point, to 2.5 percent at 12:16 p.m. in New York, according to Bloomberg Bond Trader prices. It touched 2.46 percent, the lowest since June 21. The 1.75 percent note due in May 2023 gained 1/4, or $2.50 per $1,000 face amount, to 93 14/32. The yield dropped seven basis points yesterday, the biggest decline since June 13, after touching 2.66 percent on June 24, the highest since August 2011.

Thirty-year bond yields fell three basis points to 3.55 percent. They dropped as much as seven basis points earlier.

June Loss

Treasuries lost 1.8 percent this month through yesterday, according to the Bloomberg U.S. Treasury Bond Index. The MSCI World Index of shares declined 3 percent in the same period, including reinvested dividends. Treasuries have fallen 2.6 percent this quarter and 2.8 percent this year, according to the Bank of America Merrill Lynch U.S. Treasury Index.

“If labor market conditions and the economy’s growth momentum were to be less favorable than in the FOMC’s outlook -- and this is what has happened in recent years -- I would expect that the asset purchases would continue at a higher pace for longer,” Dudley said in a speech today in New York. He serves as vice chairman of the Federal Open Market Committee and has never dissented from a monetary policy decision.

The U.S. central bank is purchasing $85 billion of U.S. government debt and mortgage-backed securities every month to put downward pressure on borrowing costs during the third round of its quantitative-easing stimulus program. The Fed bought $5.1 billion in Treasuries today due from June 2017 to February 2018. Dealers had submitted $10.5 billion of securities.

The Fed has kept its benchmark interest-rate target at zero to 0.25 percent since 2008 to support the economy.

Bernanke Comments

Chairman Ben S. Bernanke said June 19 the central bank may slow stimulus this year and end it entirely in mid-2014. Speaking after the FOMC’s two-day meeting, he said tapering the purchases would depend on economic growth being in line with the Fed’s estimates. Policy makers are forecasting growth of as much as 2.6 percent this year and 3.5 percent next year.

Richmond Fed President Jeffrey Lacker said yesterday the central bank isn’t close to decreasing its balance sheet.

“We’re not anywhere near decreasing the balance sheet yet,” Lacker, who doesn’t vote on the FOMC this year, said in a Bloomberg Television interview with Peter Cook. “This asset-purchase tapering is just slowing the rate at which we’re increasing the balance sheet.”

U.S. household purchases, which account for about 70 percent of the economy, rose 0.3 percent in May after a 0.3 percent decline the prior month that was the biggest since September 2009, Commerce Department figures showed today in Washington. Incomes advanced 0.5 percent, more than projected.

Initial jobless claims decreased by 9,000 to 346,000 in the week ended June 22 from a revised 355,000 the prior period, the Labor Department reported today in Washington.

Note Auction

The seven-year notes scheduled for sale today yielded 1.955 percent in pre-auction trading, which would be the highest since an offering in July 2011.

The previous sale of the securities on May 30 drew a yield of 1.496 percent. Investors bid for 2.7 times the amount of available debt last month, versus 2.71 times in April.

The U.S. sold $35 billion of two-year notes on June 25 and an equal amount of five-year debt yesterday.

Pimco’s Gross said global markets are reducing risk because of speculation about the Fed’s policy.

“In trying to be specific about which conditions would prompt a tapering of QE, the Fed tilted overrisked investors to one side of an overloaded and overlevered boat,” Gross said in his July commentary, titled “The Tipping Point,” posted on Pimco’s website. “Don’t panic,” he wrote.

Pimco Losses

Newport Beach, California-based Gross’s $285 billion Pimco Total Return Fund led declines among the most-popular bond mutual funds earlier this month after the Bernanke’s comments on asset purchases sparked a global selloff in bonds.

Gross’s flagship, the world’s largest mutual fund, lost 1.6 percent from June 18 through June 20, the day after the Fed outlined its exit scenario, and is down 3.59 percent for the year, beating just 12 percent of peers.

The Pimco chief forecasts the 10-year yield may fall about 20 to 25 basis points, helping the fund to “get back some of those losses that we experienced in May and June.” He spoke in a Bloomberg Radio interview with Tom Keene and Michael McKee.

Gross said he likes “safe assets that are over-yielded and underpriced,” including five-year and 10-year securities. He said he’s looking for “a mini-bull market for the next several months.”

The difference in yield between 10-year notes and Treasury Inflation Protected Securities, a measure of expectations for inflation over the life of the securities, widened to 2 percentage points after shrinking to 1.81 percentage points on June 24, the narrowest since October 2011.

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