BLBG:Treasuries Rise Before $5 Billion Fed Purchase, Pushing Yields to Week Low
Treasuries rose, pushing 10-year yields to the lowest level in a week, before the Federal Reserve buys U.S. government debt today and on concern Europe’s rescue of Greece won’t resolve the region’s debt crisis.
The Fed is scheduled to purchase as much as $5 billion of notes due from February 2018 to February 2020 today as part of its efforts to keep borrowing costs down. Policy makers will probably announce a third round of outright purchases in the second quarter, according to Jefferies & Co. Inc., one of the 21 primary dealers that trade with the central bank.
“The Fed wants to keep rates down,” said Roger Bridges, who oversees the equivalent of $16 billion of debt as the Sydney-based head of fixed income at Tyndall Investment Management Ltd., a unit of Nikko Asset Management Co. in Japan. “You’ve got a buyer in the market all the time. I think Treasuries are very expensive.”
U.S. 10-year yields slid two basis points to 1.96 percent as of 7:06 a.m. in London, according to Bloomberg Bond Trader prices. The 2 percent security maturing in February 2022 rose 5/32, or $1.56 per $1,000 face amount, to 100 3/8. The rate was as low as 1.95 percent, the least since Feb. 16.
The MSCI Asia Pacific Index of shares fell 0.8 percent, heading for its steepest decline in a week and helping increase demand for debt.
U.S. two-year notes yielded 0.30 percent, after climbing to 0.31 percent at the end of last week, the most since Oct. 27. The 14-day relative strength index for two-year yields suggests rates won’t rise much further. The index was at 67.8, after climbing to 70.7 on Feb. 24. A reading of more than 70 suggest to some traders rates may be about to reverse direction.
Japan’s 10-year yield was unchanged at 0.97 percent, after rising 2 1/2 basis points last week.
Bernanke Testimony
The Fed is replacing $400 billion of shorter-maturity Treasuries in its holdings with longer-term debt to cap borrowing costs under a program it plans to conclude in June.
Chairman Ben S. Bernanke will give his semi-annual monetary policy report to House lawmakers on Feb. 29 and the following day to the Senate Banking Committee.
Bernanke may use the speeches to “plant the seeds” for additional bond buying, Ward McCarthy and Thomas Simons, New York-based economists for Jefferies, wrote in a report Feb. 24. The Fed will focus its purchases on mortgage-backed securities, acquiring $500 billion to $650 billion of them to support the U.S. housing market, the report said. The central bank will probably also buy long-term Treasuries, it said.
Opposition to Purchases
Officials aren’t in agreement on the plan. James Bullard, president of the Fed Bank of St. Louis, and Charles Plosser, the Philadelphia Fed President, both said on Feb. 24 that they oppose further purchases of mortgage securities.
U.S. economic growth will push 10-year yields up to 2.48 percent this year, a Bloomberg survey of banks and securities companies shows.
Pending home sales probably rose 1 percent in January, recovering from December’s 3.5 percent slide, according to the median forecast in a Bloomberg News survey of economists before the National Association of Realtors reports the figure today.
“Housing is bottoming out and starting to recover,” said Hiroki Shimazu, an economist in Tokyo at SMBC Nikko Securities Inc., a unit of Japan’s third-largest publicly traded bank by assets. “Yields around 2 percent are too low.”
Manufacturing probably accelerated for a fourth month in February, consumer confidence improved and Americans picked up the pace of spending in January, economists forecast separate reports this week will show.
Europe Rebuffed
Group of 20 nations rebuffed German-led calls to come to Europe’s rescue as it battles the region’s debt crisis, helping maintain demand for the relative safety of U.S. debt. Officials from the countries met in Mexico City over the past two days.
The bailout that rescued Greece from a default has failed to restore confidence in credit markets, where traders are paying nine times more to insure European government bonds than they are for Treasuries.
While European stocks are off to their best start since 1998, the relative cost of credit default swaps has risen to a record, according to CMA.
“Bond markets don’t believe in the same story that stock markets do,” Robin Marshall, director of fixed income in London at Smith & Williamson Investment Management, which oversees about $18 billion, said in a Feb. 22 interview. “Countries are still saddled with huge debt.”
The Markit iTraxx SovX Western Europe index of default swaps linked to 15 nations from Finland to Italy increased nine basis points in February to 348, up 34 percent since July, indicating a rising perception of risk. It reached an all-time high of 385 on Nov. 25. The cost of insuring U.S. debt dropped by more than 40 percent in that period. The ratio between the two rose a record 9.81-to-1 on Feb. 23.
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
