U.S. Yield Gap Widens to 2-Year High as Yellen Backs Stimulus

The difference between Treasury five-year and 10-year notes yields widened to the most in more than two years as Federal Reserve Chairman-nominee Janet Yellen told Congress she will promote the Fed’s unprecedented stimulus program until economic growth is stronger.

Thirty-year bonds briefly pared gains after a $16 billion sale of the debt drew lower-than-average demand. The bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 2.16, versus an average of 2.48 at the past 10 auctions. Inflation control is important and the central bank’s stimulus program “will not continue indefinitely,” Yellen testified at her confirmation hearing to lead the Fed.

“As dovish as Yellen is, she’s dovish for the front end of the curve,” said David Ader, U.S. government bond-strategy head at CRT Capital Group LLC in Stamford, Connecticut. “The 30-year got themselves a little bit of a concession. The market is quite range-bound right now.”

The current 30-year yield dropped three basis points, or 0.03 percentage point, to 3.79 percent at 4:59 p.m. in New York, according to Bloomberg Bond Trader prices. The 3.625 percent bond due in August 2043 rose 18/32, or $5.63 per $1,000 face amount, to 97 1/8. The yield fell as much as six basis points.

The 10-year yield dropped three basis points to 2.69 percent.

Bond Sale

The yield curve measuring the difference between Treasury five-year and 10-year note yields in the U.S. reached 1.37 percentage points, the most since August 2011, on speculation the Fed’s target interest rate may be lower for longer under a Yellen-led Fed.

“Supporting the recovery today is the surest path to returning to a more normal approach to monetary policy,” Yellen, the Fed’s vice chairman, said in remarks to the Senate Banking Committee.

Traders project an 87 percent chance the Fed will keep its benchmark rate at current levels by December 2014, compared with 74 percent odds a month earlier, according to Fed funds futures data compiled by Bloomberg.

Policy makers have pledged interest rates will stay at almost zero while the outlook for inflation is no higher than 2.5 percent and unemployment remains above 6.5 percent. The jobless rate was at 7.3 percent last month, the Labor Department reported on Nov. 8.

Economic Targets

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, rose to $370.5 billion, above the 2013 average of 314.87 billion. It fell to a 2013 low of $147.8 billion on Aug. 9. The high was $662.3 billion on May 22.

Volatility in Treasuries as measured by the Merrill Lynch MOVE Index fell to 61.95, the lowest level since Oct. 31 and below the 2013 average of 71.8.

Policy makers have pledged interest rates will stay at almost zero while the outlook for inflation is no higher than 2.5 percent and unemployment remains above 6.5 percent. The jobless rate was at 7.3 percent last month, the Labor Department reported on Nov. 8.

“There’s an increased probability the unemployment rate threshold could be lowered from 6.5 percent to 5.5 percent,” said Donald Ellenberger, head of multi-sector strategies at Federated Investors in Pittsburgh. “That would have significant implications for the Treasury market.”

Fed Policy

The U.S. central bank currently buys $85 billion of Treasuries and mortgage-backed securities each month to keep downward pressure on borrowing costs. It purchased $3.171 billion today in notes maturing between November 2020 and August 2023. Officials will decide to pare their purchases to $70 billion a month at their March 18-19 meeting, according to the median of 32 economist estimates in a Bloomberg News survey on Nov. 8.

Fed Bank of Philadelphia President Charles Plosser, an opponent of Fed bond purchases, said the central bank should focus on price stability as its primary objective, and not worry as much about “fluctuations” in employment.

“It would be appropriate to redefine the Fed’s monetary policy goals to focus solely, or at least primarily, on price stability,” Plosser said today in prepared remarks for a speech at the Cato Institute in Washington. “I base this on two facts: Monetary policy has very limited ability to influence real variables, such as employment. And, in a regime with fiat currency, only the central bank can ensure price stability.”

Fed Chairman Ben S. Bernanke said the central bank is falling short on its dual mandate to ensure price stability and full employment. “We’re missing on both of them,” Bernanke said yesterday in Washington. “We need a stronger, more rapidly moving economy.”

Economic Reading

Initial jobless claims in the week ended Nov. 9 declined 2,000 to 339,000 from a revised 341,000 the week before that was higher than initially reported, the Labor Department said today in Washington. The median forecast of 51 economists surveyed by Bloomberg called for a drop to 330,000. Applications for five states were estimated because of the Veterans Day holiday-shortened week, the Labor Department said.

The benchmark rate will end this year at 2.75 percent before rising to 2.90 percent by March 31, according to a Bloomberg survey of financial firms with the most recent forecasts given the heaviest weightings.

At today’s auction, the 30-year bond drew a yield of 3.81 percent, compared with the 3.793 percent average forecast in a Bloomberg News survey of seven of the Fed’s 21 primary dealers. The yield at the last offering of long bonds, on Oct. 10, was 3.758 percent.

The auction is the final of three note and bond offerings this week. The U.S. sold $30 billion of three-year debt on Nov. 12 at a yield of 0.644 percent and $24 billion of 10-year securities yesterday at a yield of 2.75 percent.

The week’s sales will raise $6.5 billion of new cash, as maturing securities held by the public total $63.5 billion, according to the U.S. Treasury.

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