Treasuries rose after Federal Reserve Chairman Ben S. Bernanke indicated that unemployment and disinflation are a threat to the recovery, fueling speculation the central bank won’t ease back on asset purchases.
Thirty-year notes headed for their second week of gains relative to 10-year securities amid speculation a faltering economy will prevent inflation from accelerating. The U.S. unemployment rate of 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. The extra yield, or spread, investors demand to hold 30-year notes instead of those due in 10 years was 138 basis points, from 150 basis points last week.
“So far, they’ve been shoring up support for their QE program and been busy explaining why it’s necessary,” said Glenn Marci, a fixed-income strategist at DZ Bank AG in Frankfurt. “We’ve seen some good data but we’ll need a more sustained recovery to have a negative impact on Treasuries.”
Ten-year yields dropped three basis points to 2.87 percent as of 9:09 a.m. in London, according to BGCantor Market Data. The 2.625 percent security due in November 2020 rose 8/32, or $2.50 per $1,000 face amount, to 97 28/32.
Yields have increased eight basis points this week. A basis point is 0.01 percentage point.
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, was at 2.12 percentage points today. It was as high as 2.49 percentage points in January and has averaged 2.08 percentage points over the past 12 months.
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.
Treasury bears are betting gains will be limited as the bond buying program fuels inflation and pushes yields higher.
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.
Faster 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. Ten-year yields have fallen from almost 16 percent in 1981.
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.
“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 Rates
Ten-year rates will rise to 3.25 percent by the end of the year, Shimomura said, revising his forecast from a month ago of 1.75 percent.
The increase in yields creates an opportunity to buy Treasuries, especially short-term maturities, Jim Caron, head of global interest-rate strategy at Morgan Stanley in New York, wrote in a report yesterday.
“We still expect a long, slow economic recovery,” wrote Caron at Morgan Stanley, another primary dealer. “We focus on front-end purchases because we feel most strongly that the Fed will remain on hold for an extended period.”
Two-year notes yield 24 basis points more than the upper end of the Fed’s target range for overnight loans between banks. The spread widened to 29 basis points on Nov. 15, the most in two months.
To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net.
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
