Treasuries’ 2-Week Gain Biggest in Year as Bernanke Stays Course
Treasuries posted the biggest two-week gain in almost a year as Federal Reserve Chairman Ben S. Bernanke said the central bank wouldn’t slow its monthly bond-buying program unless economic conditions warrant.
Ten-year yields retreated from the 2013 high reached earlier this month as Bernanke told congressional panels this week it was “way too early to make any judgment” about whether the biggest buyer of Treasuries will starting cutting back in September. The U.S. will sell $99 billion in notes next week.
“The chairman went out of his way to discourage investors from assuming Fed tapering has been largely decided, which has calmed bond buyers down,” said Christopher Sullivan, who oversees $2.1 billion as chief investment officer at United Nations Federal Credit Union in New York. “The path of easing will clearly be data dependent, and every report will be intensely scrutinized as people are looking for any indication of whether we are on a path of policy adjustment or not.”
Treasury 10-year yields fell 10 basis points, or 0.10 percentage point, to 2.48 percent this week in New York, Bloomberg Bond Trader data showed. The price of the 1.75 percent note due in May 2023 rose 26/32, or $8.13 cents per $1,000 face amount, to 93 20/32.
This week’s drop, combined with 16 basis-point fall in the previous five days, was the biggest back-to-back decline since the period ended Aug. 31. The yield touched an almost two-year high of 2.75 percent on July 8.
“While tapering is on the agenda, the timing and pace are less certain than what had been priced in just two weeks ago,” David Ader, head of U.S. government-bond strategy at CRT Capital Group LLC in Stamford, Connecticut, wrote in a note to clients. “Bernanke and pretty much the rest of the Federal Open Market Committee have made strenuous efforts to calm the markets after the June 19 faux pas.”
Benchmark yields jumped 17 basis points that day after Bernanke said the central bank, the largest buyer of U.S. government debt, may start dialing down its unprecedented bond-buying program this year and end it entirely in mid-2014 if the economy finally achieves sustainable growth.
Two days ago, Bernanke told the Senate Banking Committee that tighter financial conditions as a result of rising yields over the past two months are “unwelcome.”
The Federal Open Market Committee has kept the benchmark interest-rate target at a record low zero to 0.25 percent since 2008 to support the economy. 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. Policy makers next meet July 30-31
“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 2.62 percent, according to the weighted average forecast in a Bloomberg survey of economists.
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 (ETSLTOTL) 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 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 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 sold $15 billion of 10-year inflation-protected securities with a yield of 0.384 percent on July 18, 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.
“The TIPS market got ahead of itself and is still too rich and has overpriced demand,” said Aaron Kohli, an interest-rate strategist in New York at BNP Paribas SA, a primary dealer. “The economy hasn’t seen inflation pressure to justify TIPS strength.”
The U.S.’s Aaa credit-rating outlook was revised to stable from negative by Moody’s Investors Service, which said the government’s debt trajectory has steadied with budget deficits narrowing.
Growth in the economy, “while moderate,” is proceeding even as the U.S. has enacted tax increases and spending reductions, the New York-based company said July 18 in a statement. Moody’s assigned the negative outlook in August 2011, warning that it may downgrade the U.S. for the first time on concern fiscal discipline was eroding and the economy was weakening.
“The rumors of fiscal demise of the U.S. were greatly exaggerated,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, which oversees $11 billion in fixed-income assets. “The U.S. fiscal position is getting undeniably stronger.”
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