BS: U.S. Five-Year Yield Drops to Record on Fed Debt-Buying Focus
Nov. 4 (Bloomberg) -- Treasury notes rose, pushing yields on five- and two-year securities to record lows, a day after the Federal Reserve said it will focus its $600 billion in asset purchases through June on medium-maturity debt.
The yield on the 30-year bond touched a three-month high after the central bank said yesterday it will buy fewer longer- term securities than analysts had expected. U.S. notes extended their gains as initial jobless claims rose more than forecast. Concern inflation will surge is “overstated,” Fed Chairman Ben S. Bernanke said in a Washington Post opinion piece.
“Yesterday’s announcement is still driving Treasuries, with the intermediate sector continuing to outperform and the long end being left to its own devices,” said Sean Murphy, Treasury trader in New York at Societe Generale SA. “Higher- than-expected jobless claims data is adding to the move.”
The five-year note yield fell nine basis points, or 0.09 percentage point, to 1.03 percent at 10:16 a.m. in New York, according to BGCantor Market Data. The price of the 1.25 percent security maturing in October 2015 climbed 13/32, or $4.06 per $1,000 face amount, to 101 3/32.
The yield on the 5-year note slid to an all-time low of 1.0180 percent, while the 2-year yield dropped to a record 0.3118 percent. The 30-year bond yield was little changed at 4.05 percent after touching 4.0910 percent, the highest since July 29. The extra yield investors demand to hold 30-year bonds over 5-year notes increased to a record 3.03 percentage points.
Adjust ‘as Needed’
Fed policy makers said yesterday the central bank will expand asset purchases at a pace of about $75 billion a month through June and “will adjust the program as needed,” in a bid to rescue unemployment and avert deflation.
“Some concerns about this approach are overstated,” Bernanke said in the Washington Post opinion piece. “Critics have, for example, worried that it will lead to excessive increases in the money supply and ultimately to significant increases in inflation.”
Treasuries due in 5 1/2 years to 10 years will account for 46 percent of the Fed’s purchases, according to the New York Fed. Securities maturing in 17 years to 30 years will make up 4 percent of the total.
“The unloved, ignored and rejected 30-year bond is just a bystander this morning as intermediate Treasuries toot horns and dance around with lampshades on,” William O’Donnell, U.S. government bond strategist in Stamford, Connecticut, at Royal Bank of Scotland Plc’s RBS Securities Inc. unit, wrote in a research note. “What the New York Fed announced yesterday afternoon was akin to plugging in a toaster and chucking it in the bathtub that the 30-year bond and I were playing in.” RBS is one of the 18 primary dealers that trade with the Fed.
Inflation View
Treasuries indicate investors have been increasing bets that inflation will accelerate.
The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the maturities known as the break-even rate, widened to 2.21 percentage points today from this year’s low of 1.47 percentage points on Aug. 25. The 30- year break-even rate was 2.67 percentage points after reaching 2.74 points yesterday, the most since May 2008.
Before yesterday’s announcement, the Fed was already reinvesting proceeds from its holdings of mortgage bonds in Treasuries to keep money from draining out of the banking system. The central bank is due to buy notes maturing from October 2014 to September 2016 today.
Debt Buying
The Fed’s debt buying is known as quantitative easing because it aims to increase the quantity of money. Yesterday’s action has been dubbed “QE2” by analysts and investors because it’s the second round of quantitative easing.
The central bank won’t be able to bring down U.S. unemployment by itself, according to Pacific Investment Management Co., which runs the world’s biggest bond fund.
“The unfortunate conclusion is that QE2 will be of limited success in sustaining high growth and job creation in the U.S., and will complicate life for many other countries,” wrote Mohamed A. El-Erian, chief executive officer at Newport Beach, California-based Pimco, in an article published by FT.com. “With domestic outcomes again falling short of policy expectations, it is just a matter of time until the Fed will be expected to do even more.”
The government is selling today $10 billion of 1.25 percent inflation-indexed notes maturing in July 2020. When the securities were sold Sept. 2, they fetched a yield of 1.019 percent and drew bids for 2.80 times the amount of debt sold.
U.S. initial jobless claims rose to 457,000 in the week ended Oct. 30 from a revised 437,000 the prior week, Labor Department figures showed today. The median forecast of 50 economists in a Bloomberg News survey was for an increase to 442,000 from a previously reported 434,000.
The unemployment rate has been above 9 percent since May 2009. It was at 9.6 percent in October, unchanged from the previous month, according to the median estimate of analysts before tomorrow’s payrolls report.
--With assistance from Wes Goodman in Singapore. Editors: Dennis Fitzgerald, Greg Storey
To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Paul Dobson in London at pdobson2@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
