Treasuries rose, trimming a weekly loss, after Federal Reserve Chairman Ben S. Bernanke said unemployment and disinflation are a threat to the U.S. recovery.
The unemployment rate at 9.6 percent is “high and, given the slow pace of economic growth, likely to remain so for some time,” Bernanke said in prepared remarks. “We cannot rule out the possibility that unemployment might rise further in the near term,” he said. Inflation has slowed since the most recent recession began in December 2007, and “further disinflation could hinder the recovery,” the Fed chairman said.
“We forecast the deflation environment will continue,” said Hiromasa Nakamura, who helps oversee the equivalent of $35.9 billion as a senior investor in Tokyo at Mizuho Asset Management Co., a unit of Japan’s second-largest publicly traded bank. “The best bond market is the U.S.”
Ten-year yields dropped four basis points to 2.86 percent as of 6:19 a.m. in London, according to BGCantor Market Data. The 2.625 percent security due in November 2020 rose 9/32, or $2.81 per $1,000 face amount, to 97 30/32.
Yields have increased eight basis points this week. A basis point is 0.01 percentage point.
Europe’s bond market is less attractive as Ireland contemplates seeking an international bailout, Nakamura said. Japanese 10-year yields of 1.06 percent are too low, he said.
The Fed released the text of Bernanke’s speech in Washington before an address scheduled to take place at 11:15 a.m. today in Frankfurt at a European Central Bank conference on monetary policy.
Inflation Slows
U.S. consumer prices excluding food and fuel increased by 0.6 percent in October from a year earlier, the smallest gain since records began in 1958, the Labor Department said Nov. 17.
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 securities, widened to 2.12 percentage points from this year’s low of 1.47 percentage points in August. The average over the past five years is 2.09 percentage points.
The Fed said earlier this month it intends to purchase $600 billion of Treasuries through June, a strategy known as quantitative easing because it targets the quantity of money in the economy.
The central bank is scheduled to buy $1.5 billion to $2.5 billion of government debt maturing from August 2028 to November 2040 today as part of its plan.
Successful Stimulus
Paul McCulley at Pacific Investment Management Co., which runs the world’s largest bond fund, said rising long-term Treasury yields indicate investors are betting the central bank will be successful in spurring the economy.
Ten-year rates climbed to 2.96 percent on Nov. 16, the highest level in three months.
The difference between two- and 10-year yields widened to 2.45 percentage points that day from 2010’s low of 1.94 percentage points in August. The five-year average is 1.29 percentage points.
Two-year rates tend to track the Fed’s target for overnight lending because of their shorter maturity. Yields on longer-term bonds are more influenced by inflation and by the size of the government’s debt.
Higher Growth
“The marketplace is betting that QE, and more broadly speaking an accommodative monetary policy, will be successful in generating higher nominal growth,” McCulley said yesterday on Bloomberg Radio’s “The Hays Advantage” with Kathleen Hays. “The grand super secular bull market is essentially over,” said McCulley, a portfolio manager for Pimco, which is based in Newport Beach, California.
In an investor survey by Citigroup Global Markets Inc., 40 percent of respondents expected the 10-year yield to be between 2.5 percent and 2.75 percent at year-end.
Most of the rest expected the figure to be more than 2.75 percent, according to Citigroup, which is one of the 18 primary dealers required to bid at the government’s debt sales.
Ten-year yields have fallen from almost 16 percent in 1981.
“Treasuries are quite vulnerable,” said Hideo Shimomura, who helps oversee the equivalent of $59.8 billion in Tokyo as chief fund investor at Mitsubishi UFJ Asset Management Co., a unit of Japan’s biggest publicly traded bank. Fed efforts to spur growth “should work in the long run,” he said.
Ten-year yields will rise to 3.25 percent by the end of the year, Shimomura said, adjusting his forecast from a month ago of 1.75 percent.
Treasuries also advanced today as Asian stocks gave up initial gains, increasing demand for the relative safety of government debt.
The MSCI Asia Pacific Index of shares fell 0.1 percent, after being up 0.6 percent.
To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.
To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.
