MW: Treasurys gain as investors buy before Fed steps in
Treasury prices advanced Thursday, pushing 10-year yields to their lowest this year, as overseas investors reacted to the Federal Reserve's surprise move to make purchases of $300 billion in U.S. notes over the next six months.
Ten-year yields fell 2 basis points to stand at 2.51%, after falling to 2.45% in earlier trading. A basis point is one hundredth of a percent.
On Wednesday, government bonds staged a historic rally as yields dropped by their widest margin since the 1987 stock market crash.
"The move forces investors to reassess whether they should be owning Treasurys here," said Jeffrey Given, portfolio manager at MFC Global Investments. "Everything else was helping on the margin but it wasn't enough to spur growth."
Two-year yields , however, were little changed at 0.82%, after falling to 0.77% earlier. On Wednesday, the yields dropped the most since October.
Touching off the rally, the U.S. central bank announced Wednesday that it plans to buy government notes with maturities of two to 10 years.
In the near term, 10-year yields may retest their lows of 2.06%, said George Goncalves, chief Treasury and agency debt strategist at Morgan Stanley.
The Federal Open Market Committee also said it would buy an additional $750 billion of agency mortgage-backed securities, a move intended "to provide greater support to mortgage lending and housing markets." This brings the total amount of agency mortgage-backed securities purchases to $1.25 trillion. See more on Fed's plans.
The Fed said it would double its purchase of agency debt, bringing the total to $200 billion.
That may also, somewhat paradoxically, help lower Treasury yields if it sparks more mortgage refinancing, which forces investors to adjust the duration of their portfolio by buying Treasurys. Duration is a measure of the sensitivity of the price of a fixed-income asset to a change in interest rates, and is partially determined by maturity.
"To the extent Wednesday's rally can provoke lower mortgage lending rates, we can then look to some form of a refi boomlet," said strategists at RBS Greenwich Capital.
The Fed is buying Treasurys "because consumer lending rates have remained sticky at higher levels despite Fed cuts and mortgage purchases," Morgan Stanley's Goncalves said. "It is also a safety net to their existing market support schemes that were being used less aggressively than hoped for."
Data also weak
Treasurys also played off Labor Department data showing initial claims for unemployment benefits declined in the most recent week, though continuing claims increased to a new record, indicating finding a new job is increasingly difficult. See more on jobless claims.
Notably, Fed officials on Wednesday removed language saying they expected the economy to recover later this year. The latest information only showed further contraction, they said.
"The market appears to be realizing the severity of the situation, but has not yet fully priced it," said T.J. Marta, strategist and founder of research firm Marta on the Markets.
"The realization that any economic recovery will derive solely from persistent governmental fiscal and monetary stimulus is gaining ground, but the situation remains more dire than is generally appreciated."
