Treasury Yields Touch 2-Week Low as Bernanke Eases Taper Concern

Treasury 10-year yields fell to the lowest level in two weeks after Federal Reserve Chairman Ben S. Bernanke signaled no imminent exit from the central bank’s quantitative-easing program.

U.S. government debt rose for a third day as Bernanke addressed the House Financial Services Committee, saying in prepared testimony the program’s asset purchases “are by no means on a preset course” and could be reduced more quickly or expanded as economic conditions warrant. Bernanke will testify before the Senate tomorrow. Treasuries extended gains as starts of new U.S. homes unexpectedly fell in June to the lowest level in almost a year.

“The market was pricing in tapering by September, but Bernanke has calmed the markets down,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “We seem to be still on pace for tapering, but the scope of the tapering and how aggressive the Fed will be is still up in the air.”

The benchmark 10-year yield fell four basis points, or 0.04 percentage point, to 2.49 percent as of 5 p.m. New York time, according to Bloomberg Bond Trader data. It touched 2.46 percent, the lowest since July 3. The price of the 1.75 percent security maturing in May 2023 gained 11/32 or $3.44 per $1,000 face amount to 93 19/32.

Yields on the 10-year note rose to 2.75 percent on July 8, the highest since August 2011, from a 2013 low of 1.61 percent on May 1. They remain below the five-year average of 2.74 percent.

Volume, Volatility

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, rose 42 percent to $363.2 billion, the highest level since July 5, from $256.16 billion yesterday. The 2013 average is $320.3 billion.

Volatility in Treasuries as measured by the Merrill Lynch Option Volatility Estimate MOVE Index was at 81.92, the lowest level since June 17. The figure is down from 117.89 on July 5, the highest since December 2010. The one-year average is 64.6.

Treasuries have lost 2.6 percent this year, according to Bank of America Merrill Lynch indexes, amid speculation that the Fed may begin to slow asset buying under its quantitative-easing strategy. U.S. government debt gained 2.2 percent last year.

El-Erian’s View

The term premium, which measures the risk of holding longer-dated bonds by incorporating investors’ outlook for inflation and growth, was at the most expensive levels in almost a month. The gauge was at 0.19 percent today, the lowest level since June 20, after touching 0.46 percent on July 5. The figure averaged 0.40 percent in the decade before the 2007 financial crisis. A declining number means investors are demanding less compensation to own the securities. A negative number means the securities are overvalued.

The yield on the 10-year note could return to 2.2 percent this year, Mohamed El-Erian, co-chief investment officer at Pacific Investment Management Co., said in an interview on Bloomberg Television’s “In the Loop” with Betty Liu. Markets “took the tapering too far.”

The Fed “will be holding its stock of Treasury and agency securities off the market and reinvesting the proceeds from maturing securities,” Bernanke said in today’s statement. The strategy “will continue to put downward pressure on longer-term interest rates, support mortgage markets and help to make broader financial conditions more accommodative.”

‘Data Dependent’

If the economy improved faster than expected, and inflation rose “decisively” back toward the central bank’s 2 percent target, “the pace of asset purchases could be reduced somewhat more quickly,” he said. The committee would also be prepared to increase the pace of purchases, if warranted.

The Fed chairman “suggests tapering of QE will really be data dependent, as opposed to them just trying to get out of the QE business,” said Gary Pollack, who manages $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York, before the report.

Work began on 836,000 houses at an annualized rate last month, the least since August 2012 and down 9.9 percent from a revised 928,000 pace in May, figures from the Commerce Department showed in Washington. The reading was weaker than projected by any economist in a Bloomberg survey, and permits for future projects also declined.

The Fed’s Beige Book business survey said the U.S. economy maintained a “modest to moderate pace” of growth in recent weeks, bolstered by industries from housing to manufacturing.

‘Highly Accommodative’

Bernanke said July 10 the U.S. needs “highly accommodative monetary policy for the foreseeable future,” after last month saying the central bank may begin to slow its $85 billion in monthly bond purchases this year and end it mid-2014. The minutes of the Fed’s last policy meeting showed participants divided over the future course of purchases. The policy-setting Federal Open Market Committee next meets July 30-31.

The Fed’s asset-buying programs, begun in 2008, have lifted its balance sheet to $3.5 trillion from below $1 trillion five years ago. That has triggered concern that buyers will be hard to replace once the Fed begins to exit.

“The quantitative-easing policy is not on a preset course -- that’s resonating,” said George Goncalves, the head of interest-rate strategy at Nomura Holdings Inc., one of the 21 primary dealers that trade directly with the Fed. “There’s still some optionality about how they are going to do it and to what extent. The more they sound dovish is the more the market is pricing in that it may not be as big.”

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