Treasuries Post Biggest 2-Week Gain in Year on Bernanke Comments

Treasuries posted the biggest two-week gain in almost a year after Federal Reserve Chairman Ben S. Bernanke quelled concern that a reduction of monetary stimulus was imminent.

Ten-year yields fell from the 2013 high reached earlier this month after Bernanke said yesterday it was “way too early to make any judgment” about starting tapering in September. The previous day, he said the Fed’s quantitative easing is “by no means on a preset course.” Policy makers, who have kept the benchmark interest-rate target at zero to 0.25 percent since 2008, next meet July 30-31. The U.S. will sell $99 billion in notes next week.

“The market’s been held in by Bernanke’s comments overall -- they are going to be lower for longer and QE is going to be data dependent,” said Tom Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “I don’t see any big move in front of the supply. We’ll mark some time around the 2.5 percent level on the 10-year.”

Treasury 10-year yields fell four basis points, or 0.04 percentage point, to 2.48 percent at 5 p.m. New York time, Bloomberg Bond Trader data showed. The price of the 1.75 percent note due in May 2023 rose 1/8, or $3.75 cents per $1,000 face amount, to 93 20/32.

The yield has slipped 10 basis points this week, after declining 16 basis points in the previous five days, the biggest back-to-back drop since the period ended Aug. 31. It touched an almost two-year high of 2.75 percent on July 8.

Fed Funds

“The time frame may be pushed back to the end of the year, as opposed to September,” Sean Murphy, a trader in New York at Societe Generale SA, one of the 21 primary dealers that trade with the Fed, said of tapering. “The dependency on the data points going forward will be significant.”

The Fed bought $3.142 billion of Treasuries maturing between August 2020 and November 2022 today as part of its $85 billion in monthly purchases of U.S. debt and mortgage-backed securities to put downward pressure on borrowing costs.

Investors see a 40 percent chance policy makers will lift the federal funds rate to 0.5 percent or higher by December 2014, compared with 49 percent odds a week ago, data compiled by Bloomberg show.

Bernanke said tighter financial conditions as a result of rising yields over the past two months are “unwelcome,” in response to a question from the Senate Banking Committee following his testimony yesterday.

Yield Forecasts

The benchmark 10-year yield surged 81 basis points from the close on May 21, the day before Bernanke said the Fed could trim stimulus in its “next few meetings,” to the close on July 5 after a report that day showed U.S. employers added more jobs than forecast in June.

“We continue to see modest downside potential for yields over the next few weeks, reinforcing our near-term bullish bias for Treasuries,” Millan Mulraine, a director of U.S. rates research at TD Securities USA LLC in New York, wrote in an e-mail. “However, as evidence of a more sustained economic rebound begins taking shape later this quarter, we expect the slow normalization in rates to begin in earnest, taking 10-year yields back to 2.60 percent by year-end.”

The yield on the 10-year note is forecast to end the year at 2.63 percent, according to the weighted average forecast in a Bloomberg survey of economists.

Net Longs

Hedge-fund managers and other large speculators reversed from a net-short position to a net-long position in 10-year note futures in the week ending July 16, according to U.S. Commodity Futures Trading Commission data. Speculative long positions, or bets prices will rise, outnumbered short positions by 17,735 contracts, the most since July 1. Last week, traders were net-short 47,110 contracts.

Benchmark yields have risen this year as economic indicators signaled improvement in sectors including housing, employment and manufacturing.

Purchases of previously owned homes rose last month to a 5.25 million annualized rate, which would be the most since November 2009, according to the median estimate of economists surveyed by Bloomberg News before the National Association of Realtors’ report on July 22.

The Commerce Department will say on July 24 that sales of new homes climbed in June to an annualized pace of 484,000 from a 476,000 rate the previous month, a separate survey showed. That would be the most since June 2008.

The Treasury Department will auction $35 billion of two-year debt, $35 billion of five-year notes and $29 billion of seven-year securities on consecutive days starting on July 23.

The Treasury yesterday sold 10-year inflation-protected securities with a positive yield for the first time in almost two years.

The $15 billion of 10-year TIPS were auctioned at a yield of 0.384 percent, the highest since July 2011 and first above zero since November of that year. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.44, versus the 2.68 average for the past 10 auctions.

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