BLBG: Treasuries Rise as Fed Set to Buy; Yield Drops to 16-Month Low
By Wes Goodman and Candice Zachariahs
Aug. 11 (Bloomberg) -- Treasuries rose, pushing benchmark 10-year yields to the lowest level in 16 months, as the Federal Reserve prepared to start buying longer-maturity U.S. debt after announcing the purchases to spur a slowing economy.
Benchmark notes gained for a second day after the central bank said yesterday “the pace of recovery in output and employment has slowed in recent months.” The Treasury is scheduled to auction $24 billion of 10-year debt today, the second of three sales this week totaling $74 billion.
“Bondholders sure aren’t complaining now that the Fed is buying again,” said Kazuaki Oh’e, a debt salesman in Tokyo at Canadian Imperial Bank of Commerce, Canada’s fifth-largest lender. “There’s more chance for yields to head south.”
The yield on the 10-year note fell one basis point to 2.75 percent as of 7:37 a.m. in London, according to BGCantor Market Data. The price of the 3.5 percent security due in May 2020 gained 4/32, or $1.25 per $1,000 face amount, to 106 11/32.
Yields are at the lowest level since April 2009. They will slide to 2.50 percent over the next few months, Oh’e said.
The difference between two- and 10-year rates was 2.23 percentage points after narrowing to 2.21 percentage points yesterday, the least since May 2009.
MSCI’s Asia Pacific Index of shares dropped 1.6 percent, falling for a third day and helping increase demand for the relative safety of government debt.
Treasuries rallied yesterday after the Fed said it will reinvest principal payments on its mortgage holdings into long- term U.S. debt securities.
‘Rough Period’
“It’s a clear indication that the Fed remains committed to get the economy through this rough period,” said Steve Rodosky, the head of Treasury and derivatives trading at Newport Beach, California-based Pacific Investment Management Co., which runs the world’s largest bond fund.
The Fed kept the target lending rate for overnight lending between banks at zero to 0.25 percent, and retained a commitment to keep its benchmark close to zero for an “extended period.”
“The pace of economic recovery is likely to be more modest in the near term than had been anticipated,” the Federal Open Market Committee said in a statement in Washington. “To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve’s holdings of securities at their current level.”
Purchasing Schedule
The central bank said in a separate statement it will announce a purchasing schedule today and that its buying will be concentrated “in the two- to 10-year sector” of the maturity spectrum, though it will also buy other maturities as well as Treasury Inflation Protected Securities.
The Fed will probably buy $300 billion to $325 billion of Treasuries in the next year, Ajay Rajadhyaksha and Dean Maki at Barclays Capital Inc. in New York wrote in an e-mail to clients.
Purchases will be skewed toward intermediate maturities because rates on short-term notes are already low, according to Barclays, one of the 18 primary dealers that are required to bid at the government debt sales. Two-year notes yielded 0.51 percent, versus the record low of 0.4977 percent set Aug. 6.
The central bank bought $300 billion of government debt between March and October 2009 to bring down borrowing costs.
Ten-Year Sale
The gain in Treasuries was tempered as investors prepared to bid at today’s 10-year sale, said Skye Masters, an interest- rate strategist at Royal Bank of Scotland Group Plc in Sydney.
“That’s one thing that limited the extent to which Treasuries could rally,” Masters said. The market will “build a concession into that auction but if it goes well then that 2.75 level can be broken.”
A sustained drop in yields below 2.75 percent may lead to further declines to 2.66 percent, she said.
The 10-year securities scheduled for sale yielded 2.79 percent in pre-auction trading, compared with 3.119 percent at the previous sale of the notes on July 13.
Investors bid for 3.09 times the amount of debt on offer last month. The average at the prior 10 auctions including June was 3.06. Indirect bidders, the group that includes foreign central banks, bought 41.7 percent of the debt, versus the 10- sale average of 39.4 percent.
Ten-year notes, among the most sensitive to inflation, are outperforming shorter-maturity debt as consumer prices fall. The securities have returned 11.3 percent this year, versus 7.1 percent for the broader market, according to Bank of America Merrill Lynch indexes.
“Measures of underlying inflation have trended lower in recent quarters,” the Fed said in its statement.
Consumer prices excluding food and energy rose 0.9 percent in July from a year earlier, holding at a 44-year low, economists said before the Labor Department report on Aug. 13.
The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, has narrowed to 1.78 percentage points from this year’s high of 2.49 percentage points in January.
To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net; Candice Zachariahs in Sydney at czachariahs2@bloomberg.net.
