BLBG: Treasuries Rally as Fed Plan to Buy Mortgages Prompts Hedging
By Daniel Kruger and Liz McCormick
Nov. 25 (Bloomberg) -- Treasuries gained as the Federal Reserve’s plan to purchase as much as $600 billion in mortgage securities prompted investors to hedge against losses in their portfolios.
Investors holding mortgage securities often use swaps and Treasuries to guard against swings in interest rates, which can trigger changes in levels of expected mortgage refinancing and duration, or the average maturity of their holdings. A swap in an agreement to exchange fixed for variable-rate payments over a period of time.
“The plan to buy $600 billion will take a lot of duration out of the market which will be equivalent to several hundred billion dollars of 10-year notes,” said Ira Jersey, an interest-rate strategist at Credit Suisse Group AG in New York.
Yields on the 10-year note tumbled 19 basis points, or 0.19 percentage point, to 3.15 percent at 9:57 a.m. in New York, according to BGCantor Market Data. The 3.75 percent security due November 2018 climbed 1 19/32, or $15.94 per $1,000 face amount, to 105 4/32. The yield dropped to 2.99 percent on Nov. 20, the lowest since records started in 1962.
The difference between the yields of 10-year Treasuries and the 30-year current coupon Fannie Mae security narrowed 17 basis points to 1.91 percentage points after reaching 2.33 percentage points on Nov. 20, the widest since March 6.
“Because mortgage rates are down, mortgage pre-payments are up, so investors have to hedge,” said Tony Crescenzi, chief bond strategist at Miller Tabak & Co. in New York. “The prepayment levels have just changed dramatically.”
Note Auction
The five-year note yield fell 13 basis points to 2.08 percent before a record $26 billion sale of the securities.
At the last five-year note auction, on Oct. 30, investors bid for 2.28 times the amount of debt on offer. The average so- called bid-to-cover ratio for the past 10 sales is 2.12.
The difference between yields on two- and 10-year Treasuries narrowed 21 basis points to 1.91 percentage points, the lowest since Sept. 30 when it was 1.86 percentage points.
U.S. notes returned 3.7 percent this month, the most since 1995, according to Merrill Lynch & Co.’s U.S. Treasury Master index, as investors shunned higher-yielding securities.
The Fed said it will purchase as much as $600 billion in debt issued or backed by government-chartered housing-finance companies and set up a $200 billion program to support consumer and small-business loans, the central bank said in a statement today in Washington.
“Something like this was going to happen because none of the other things were working,” said David Ader, head of U.S. government bond strategy at RBS Greenwich Capital in Greenwich, Connecticut, another primary dealer. “The market was clamoring for months and months and months and thinking the Fed’s going to have to buy this stuff in order to send out a message, and here you go.”
To contact the reporter on this story: Daniel Kruger in London at dkruger1@bloomberg.net
