Treasuries Rise on Speculation Fed May Keep Low-Rate Policy

Treasuries rose as investors speculate interest rates will remain low for an extended period even as the Federal Reserve is forecast to end its bond-buying as U.S. economic data improves.

Benchmark 10-year yields fell as the central bank conducted its final scheduled bond purchase today under its third round of quantitative easing before policy makers begin a two-day meeting tomorrow. The government will sell $29 billion of two-year notes tomorrow in the first of four auctions this week totaling $108 billion.

“The market is pushing back the first rate hike,” said Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc., one of 22 primary dealers that trade with the Fed. “Yields are at the upper end of the range of 2.05 to 2.3 percent” on the 10-year.

The benchmark 10-year yield fell one basis point, or 0.01 percentage point, to 2.26 percent as of 5 p.m. New York time, according to Bloomberg Bond Trader data. It rose to 2.30 percent earlier, approaching a three-week high. The price of the 2.375 percent note due in August 2024 added 2/32, or 63 cents per $1,000 face amount, to 101. Ten-year notes fell last week for the first time since mid-September.

Two-year yields dropped one basis point to 0.38 percent. The Standard & Poor’s 500 Index lost 0.2 percent after the gauge rallied 4.1 percent last week. Crude oil futures traded below $80 per barrel in New York.

Fed Policy

Treasury trading volume at ICAP Plc, the largest interdealer broker of U.S. government debt, was $199.8 billion, the lowest level since Aug. 25. It reached a record $946 billion on Oct. 15.

The Fed said in September it will end its bond-purchase program at its meeting this week as long as the U.S. economy keeps improving. Today, the central bank acquired $931 million of Treasuries maturing from February 2036 to February 2044.

The Treasuries market expects “the considerable-time language to be retained,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “The data has been consistent with a sideways muddling recovery rather than any acceleration that would risk price inflation.”

There’s about a 66 percent chance the Fed will increase its target to at least 0.5 percent by December 2015, futures data compiled by Bloomberg show. The central bank has held its short-term interest-rate target at zero to 0.25 percent since December 2008.

The Fed has expanded its balance sheet assets to $4.5 trillion from less than $1 trillion in 2008 in an effort to stimulate growth after the global financial crisis.

The European Central Bank announced it bought 1.704 billion euros ($2.2 billion) of covered bonds last week as it started its latest effort to revive the euro-area economy.

Economic Outlook

A report on Oct. 30 will show U.S. gross domestic product expanded at a 3 percent annual rate in the third quarter, according to a Bloomberg News survey of analysts. That compares with growth of 4.6 percent in the second quarter.

“We’re stuck in this whole U.S.-versus-the-rest-of-the-world story,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “We’re looked on as the place to be and rates are lower than what they should be, based on where the economy is.”

For 2014, economic expansion will be 2.2 percent in the U.S., 1 percent in Japan and 0.8 percent in the euro area, based on Bloomberg News surveys of economists. A gauge of consumer confidence rose to 87 this month, compared with a decline to 86 in September, another Bloomberg survey of economists shows.

The U.S. will sell $35 billion of five-year debt Oct. 29, and $29 billion of seven-year securities on Oct. 30. It also plans to auction $15 billion of two-year floating-rate debt on Oct. 29.

Price Swings

Market moves on Oct. 15, when 10-year yields dropped as much as 34 basis points to 1.86 percent, suggests dwindling liquidity is an issue even for the deepest market such as U.S. Treasuries.

JPMorgan & Chase Co., a primary dealer, estimates the amount of U.S. debt available to trade at one time without moving prices has plunged 48 percent to $150 million since April. The measure is based on the average size of the best three bids and offers that go through the New York-based bank’s trading desks each day, calculated on a weekly basis.

“What happened was another manifestation of the world we live in after the Lehman crisis,” said Nikolaos Panigirtzoglou, a London-based strategist at JPMorgan, the top-ranked firm for U.S. fixed-income research by Institutional Investor magazine. “Liquidity dries up quickly when volatility spikes. No market is immune to that anymore.”

Ten-year yields will climb to 2.67 percent by Dec. 31, based on a Bloomberg survey of banks and securities companies, with the most recent forecasts given the heaviest weightings.

Before it's here, it's on the Bloomberg Terminal.