Fed’s willingness to buy bonds still under the microscope
By Deborah Levine, MarketWatch
NEW YORK (MarketWatch) -- Treasury prices extended losses on Thursday, pushing yields up, after a gauge of manufacturing activity in the Chicago area improved in September, reducing the impetus for the Federal Reserve to start a new bond-purchase program.
Earlier, the Labor Department said first-time jobless claims fell more than some expected in the latest week.
Yields on 10-year notes (UST10Y 2.55, +0.05, +1.92%) , which move inversely to prices, fell 5 basis points to 2.55%, after jumping to 2.58% just after the Chicago report. A basis point is 0.01%.
Yields on 2-year notes (UST2YR 0.44, +0.00, +0.91%) were little changed 0.44%, after falling closer towards an all-time low earlier.
The Chicago purchasing managers’ index climbed in September to 60.4 a big jump from 56.7 in August. Economists polled by MarketWatch had expected a drop to 55.0.
It’s “a firm read from the manufacturing sector, but not completely offsetting recent weakness,” said strategists at CRT Capital Group. “The Treasury market is trading lower on the data.”
The Labor Department said initial claims for unemployment benefits dropped 16,000 to 453,000 in the week ended Sept. 25. Read more on jobless claims.
A separate report gave the revision on second-quarter GDP, showing the economy grew at a 1.7% pace, up slightly from its previous estimate for the period. See more on GDP revision.
“Were hearing of some asset allocation from bonds to equities,” said Tom di Galoma, head of U.S. rates trading at Guggenheim Partners. Still, the typical pattern of month-end buying to keep up with benchmark indexes should limit losses into the afternoon, he said.
Still to come is the Federal Reserve’s buyback of long-term Treasurys. Analysts expect the U.S. central bank to buy about $2 billion in debt maturing from 2021 to 2040.
The operation is part of officials’ pledge announced earlier to reinvest cash from maturing mortgage-backed securities and housing agency debt back
into the bond market to support the economic recovery. See recent buyback results.
On Wednesday, Treasurys ended lower as a trio of Fed officials expressed conflicting opinions on the value of starting a new asset-buying program, or how much the Fed’s Open Market Committee should commit to purchasing if it decides to engage in quantitative easing. Read about Fed officials’ comments.
“The commentary by Fed official’s altered the pricing of a shock and awe outcome to a more calculated response ‘if needed’ at the next FOMC get together,” said John Spinello, bond strategist at Jefferies & Co.
“QE speculation continued and with five weeks to the next meeting, it should provide an erratic atmosphere as the market tries to dissect each and every comment from each and every Fed official in evaluating the pros and cons,” Spinello said.
After it’s Sept. 21 meeting, the FOMC implied QE will be very data-dependent, saying it “is prepared to provide additional accommodation if needed to support the economic recovery.”
