Bill Gross, Ben Bernanke and Fed buyback also in play
By Deborah Levine, MarketWatch
NEW YORK (MarketWatch) — Treasury prices fell Tuesday, pushing 10-year note yields up for the first day in five, as talk circulated through the bond market that the Federal Reserve may begin larger reverse repurchase operations to ease tight conditions in overnight money markets, analysts at Guggenheim Securities and CRT Capital Group said.
Yields on 10-year notes (UST10Y 3.48, +0.06, +1.64%) , which move inversely to prices, rose 5 basis points to 3.48%, after earlier sinking below 3.40%. A basis point is 1/100th of a percent.
Yields on 30-year bonds (UST30Y 4.52, +0.04, +0.87%) increased 4 basis points to 4.2%.
New rules from the Federal Deposit Insurance Corp. reduced the attractiveness of repo trading for many banks even with massive cash in the system, pushing rates down near zero.
Traders said the Fed may do reverse repo operations — where it takes money out of the system in exchange for its own assets as collateral — in bigger amounts than the tests it has been doing.
“That’s how to alleviate a squeeze: put securities in the system and take cash out,” said David Ader, head of government bond strategy at CRT.
Such operations tend to be more targeted toward adjusting liquidity in the market than monetary policy per se, but the idea of the Fed doing more reverse repos is part of why Treasury prices turned down, analysts said.
“This is making people believe they are adjusting things and are not always going to be a net buyer,” said Thomas di Galoma, head of U.S. fixed-income trading for Guggenheim.
Traders also noted that Bill Gross, who manages the world’s biggest bond fund at Pimco, said on CNBC that yields remain way below normal levels.
“Pimco’s Gross still doesn’t like Treasurys,” analysts at Action Economics said.
Reports last month said Gross sold all government-related debt from his Total Return Fund (PTTRX 10.91, +0.02, +0.18%) . See story on Gross, Buffett and Treasury bonds.
The market pared its decline after the Institute for Supply Management’s index on the services sector of the U.S. economy fell more than expected in March. Read more about ISM data.
Bonds also extended a decline after the Fed bought $7.57 billion in 2018-2021 debt. Dealers had offered $26.8 billion to the Fed. Traders noted that a very large willingness to sell debt to the Fed, compared with what they buy, is sometimes viewed as a bad sign. See Fed buyback results.
Bonds had been higher in morning trading after Federal Reserve Chairman Ben Bernanke said commodity-based inflation risks would not last, striking a more balanced tone than several other Fed officials in recent days.
Late Monday, Bernanke said commodity prices are being driven primarily by global supply and demand and don’t threaten a major acceleration of inflation. Read more on Bernanke.
“Treasurys are slightly higher ... after Fed Chairman Bernanke reinforced his views that commodity push inflation would prove to be transitory,” said bond strategists at RBS Securities.
Still to come is the release of minutes from the central bank’s recent policy meeting after 2 p.m. Eastern time.
Also slated for Tuesday are speeches from some of the Fed’s more hawkish members, whose comments over the past week contributed to yields pushing higher. Read more about bonds, Fed speakers.
