BLBG: Treasury Two-Year Yields Near Record Low Before Federal Reserve Meeting
Treasury two-year yields were near a record low on speculation the Federal Reserve will announce a new program of asset buying to boost the economy at the end of a two-day meeting starting today.
The Fed will announce plans to buy at least $500 billion of long-term securities, according to economists surveyed by Bloomberg. Policy makers will probably keep their statement open to “some chance of doing more,” said Tony Crescenzi at Pacific Investment Management Co., which runs the world’s biggest bond fund. The Republicans may retake the U.S. House and narrow Democrats’ margin in the Senate in elections today.
“The Fed will do all in its power not to disappoint investors,” said Kornelius Purps, a fixed-income strategist at UniCredit SpA in Munich. “This would argue for a rather stable Treasuries environment until tomorrow.”
Two-year notes yielded 0.34 percent at 9:57 a.m. in London, according to BGCantor Market Data. The 0.375 percent security due in October 2012 traded at 100 2/32. The benchmark 10-year note yield fell 2 basis points to 2.62 percent.
Fed policy makers said after their last meeting on Sept. 21 they were prepared to act to support the recovery and increase the inflation rate, raising speculation they will increase their government bond purchases. That helped send the two-year note yield to an all-time low 0.327 percent on Oct. 12.
Fed Buying
U.S. policy makers will restart a program of securities purchases known as quantitative easing to spur growth, reduce unemployment and increase inflation, said 53 of 56 economists surveyed last week.
Twenty-nine estimated the Fed will pledge to buy $500 billion or more, while seven predicted $50 billion to $100 billion in monthly purchases without a specified total. The remainder said the Fed would buy as much as $500 billion or didn’t quantify their forecast.
“Starting off with some amount that’s large, toward a half trillion dollars, and leaving it open-ended for some chance of doing more is probably the best expectation right now,” Crescenzi, a market strategist and portfolio manager at Newport Beach, California-based Pimco, said on Bloomberg Television.
The Rothenberg Political Report and Cook Political Report both predict the Republicans will gain at least 50 House seats, more than the 39 they need to take control.
Election Outlook
Both reports see Democrats losing six to eight seats in the Senate, just shy of the 10 needed for a Republican majority.
“With the Republicans expected to retake the House, this is presumably positive for bonds,” a team of Societe Generale SA analysts led by Vincent Chaigneau in London said in a report today. “The stalemates would lead to more cautious spending, smaller deficits and possibly a policy mix skewed toward more Treasury buying from the Fed. Investors have seen the polls, so presumably are positioned for a Republican victory.”
The Treasury will say tomorrow it will sell $71 billion of debt next week, according to the median forecast of a Bloomberg News survey of 12 primary dealers.
The U.S. will auction $31 billion of three-year notes, $24 billion of 10-year notes and $16 billion of 30-year bonds, the survey showed. In August, the Treasury sold $74 billion at the refunding, including $34 billion of three-year debt, $24 billion of 10-year notes and $16 billion of 30-year bonds.
Inflation Expectations
Expectations the Fed will succeed in sparking inflation pushed the difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of expectations for inflation known as the breakeven rate, to 2.209 percentage points today, the most since May.
The difference in yield between 5-year and 30-year bonds was at 283 basis points, after reaching 286 basis points yesterday, the most on record.
“Yields are a little too low given the fundamentals,” said Kei Katayama, leader of the foreign fixed-income group in Tokyo at Daiwa SB Investments Ltd., which oversees the equivalent of $56 billion and is part of Japan’s second-biggest brokerage. “Additional QE will increase inflation pressure.”
Ten-year yields are likely to climb to 3.25 percent by year-end, Katayama said.
The Institute for Supply Management’s gauge of services, to be released tomorrow, probably showed a 10th month of expansion. The index of non-manufacturing businesses, which covers about 90 percent of the economy, rose to 53.5 from 53.2 in September, according to a Bloomberg survey. Readings over 50 signal growth.
Western Asset Management Co., Legg Mason Inc.’s bond unit, said that Treasuries may lose value as the Fed increases costs in the economy.
Emerging-Market Debt
The company is favoring emerging-market debt, Asian currencies and U.S. corporate bonds, said Ken Leech, head of the global investment strategy committee, in a presentation to investors at the company’s office in Singapore.
“If they’re successful ultimately in raising the inflation rate,” Leech said, “that could be bearish for bonds.” Leech helps oversees $482.2 billion for Western Asset, which is based in Pasadena, California.
Deutsche Bank AG, one of the 18 primary dealers obligated to trade directly with the Fed, said the U.S. still stands to lose 200,000 jobs. The 10-year rates will fall to 2 percent by year-end, Deutsche Bank economists Joseph A. LaVorgna, Carl J. Riccadonna and Brett Ryan wrote yesterday in a report.
The U.S. added 60,000 positions in October, after a loss of 95,000 in September, according to a Bloomberg survey of economists before the Labor Department’s Nov. 5 report.
Australian bonds tumbled after the Reserve Bank of Australia unexpectedly increased its benchmark interest rate on concern stronger economic growth from a mining-driven employment boom will quicken inflation.
RBA Governor Glenn Stevens raised the overnight cash rate target by a quarter percentage point to 4.75 percent, the first move in six months. Two-year Australian yields jumped 14 basis points to 4.97 percent after earlier climbing to 4.99 percent, the highest since May 4. The Australian dollar rose to parity with its U.S. counterpart.
To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net; Paul Dobson in London at pdobson2@bloomberg.net.
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net.
