Treasury 10-Year Yield Drops to 1-Week Low on Fed Stimulus Views

Treasuries rose, pushing the yield on the 10-year note to the lowest in more than a week, on speculation the Federal Reserve will press on with bond-buying into next year.

The yield curve measuring the difference between five- and 10-year note yields reached the steepest since August 2011 last week, when Fed Chairman-nominee Janet Yellen said that she’s committed to promoting a strong economic recovery and will ensure stimulus isn’t removed too soon. The Fed carried out two purchases of Treasuries today under its quantitative-easing program, with trading abridged next week because of the Thanksgiving Day holiday.

“She’s not willing to give up the operation at this point,” said Tom Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “They are very sensitive to the fact that they need to make sure any forward guidance structure gives them confidence that rates won’t back up significantly while they come in to taper.”

Benchmark 10-year Treasury yields fell four basis points, or 0.04 percentage point, to 2.67 percent at 4:59 p.m. New York time, according to Bloomberg Bond Trader data. The price of the

2.75 percent note due November 2023 rose 10/32, or $3.13 per $1,000 face amount, to 100 23/32.

The yield on the five-year note dropped three basis points to 1.31 percent. It touched a 2013 high of 1.86 percent on Sept. 6 and a low of 0.63 percent on May 1.

Price Swings

Volatility in Treasuries as measured by the Merrill Lynch MOVE Index was at 58.31, the lowest level since May. It touched a record low of 48.87 on May 9 and a 2013 high of 117.89 on July

5.

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, dropped to $232 billion, below the 2013 average of $314 billion. It fell to a 2013 low of $147.8 billion on Aug. 9. The high was $662.3 billion on May 22.

The five- to 10-year note yield curve was at 1.35 percentage points, after reaching 1.37 percentage points on Nov. 14 as investors bet Yellen will keep short-term rates low.

“People are rushing into the five-year,” said Jason Rogan, managing director of U.S. government trading at Guggenheim Securities LLC, a New York-based brokerage for institutional investors. “That’s viewed as the safe place in the front end to park your money and still get something out of it yield-wise.”

Overseas Demand

International investors were net buyers of U.S. long-term portfolio assets in September as demand strengthened from China and Japan, the two largest foreign holders of Treasuries.

The net long-term portfolio investment inflow was $25.5 billion after a revised $9.8 billion outflow in August, the Treasury Department said in a statement in Washington.

Foreign holdings of Treasuries rose $57.1 billion or 1 percent in September to $5.65 trillion, the biggest jump since February, U.S. government data show. U.S. government securities held by overseas investors have increased 1.4 percent this year, on track for the slowest rise since the Treasury began releasing full-year data in 2001.

Holdings in China, the largest foreign creditor to the U.S., climbed by $25.7 billion, or 2 percent, in September to $1.294 trillion, the biggest gain since February. Japanese holdings of Treasuries rose for a third month by $29 billion or

2.5 percent to $1.178 trillion, the most on record.

Yellen Stance

Yellen, speaking last week during her confirmation hearing, indicated she’ll press on with the central bank’s unprecedented monetary stimulus until she sees a robust recovery, downplaying risks the policy is leading to asset bubbles.

“Although there is limited evidence of reach for yield, we don’t see a broad buildup in leverage,” she said.

Traders project an 88 percent chance the Fed will keep its benchmark rate at current levels by December 2014, compared with a 77 percent odds a month earlier, according to fed funds futures data compiled by Bloomberg.

“While growth in 2013 has been disappointing, I believe a good case can be made that the pace of growth will pick up some in 2014 and then somewhat more in 2015,” Fed Bank of New York President William C. Dudley said in the text of remarks given in Flushing, New York. “As growth picks up, I expect to see more substantial improvement in labor market conditions.”

U.S. interest-rate swaps fell to the least in more than three years relative to Treasuries as traders sought higher-yielding assets outside of government debt on bets Yellen will keep borrowing costs down.

Swaps Market

The difference between the five-year Treasury rate and similar-maturity swap narrowed to 9.75 basis points, the least since March 2010, based on closing levels. The spread shrinks as investors seek to receive a fixed-interest rate on contracts backed by a bank over the relative safety of Treasuries.

The U.S. central bank buys $85 billion of Treasuries and mortgage-backed securities each month to put downward pressure on borrowing costs. Officials will decide to pare the purchases to $70 billion a month at their March 18-19 meeting, according to the median of 32 economist estimates in a Bloomberg survey on Nov. 8.

The Fed purchased $1.47 billion in Treasuries maturing between February 2038 and August 2043 today. It also bought $3.72 billion in Treasuries maturing between August 2019 and November 2020 in its second operation.

The central bank needs to set a fixed-size for the current purchase program and “bring it to an end” after reaching that amount, Fed Bank of Philadelphia President Charles Plosser said in the text of a speech in that city. There’s little evidence more asset-buying will improve the U.S. recovery, he said.

The Standard & Poor’s 500 Index of shares rallied to a record today. High-yield debt around the world has returned 5.7 percent this year, versus a 2.3 percent loss for Treasuries, based on the Bloomberg World Bond Indexes.

The Treasury is scheduled to sell $13 billion in 10-year inflation-indexed debt on Nov. 21.

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