MW: Treasurys recover after Bernanke, China rate cut
China’s first rate cut in four years undermines fixed-income demand
By Deborah Levine, MarketWatch
NEW YORK (MarketWatch) — Treasury prices recovered Thursday, pushing benchmark 10-year yields back down slightly, after Federal Reserve Chairman Ben Bernanke said the central bank stands ready to act in the event that financial stresses from the European crisis escalate.
In zigzag trading, bonds gave up earlier gains after China’s unanticipated cut in interest rates sent investors back to equities and commodities and out of safe-haven assets.
Yields on 10-year notes 10_YEAR -1.08% , which move inversely to prices, turned down 1 basis point to 1.65%. A basis point is one one-hundredth of a percentage point.
The benchmark securities closed at a record low around 1.47% on Friday.
Thirty-year bond yields 30_YEAR -0.04% stayed up 1 basis point to 2.75%.
Yields on 5-year notes 5_YEAR -2.44% turned down 2 basis points to 0.72%.
In testimony to Congress, Bernanke said he still forecasts that U.S. growth will continue at a moderate pace.
Before his testimony, analysts are about divided whether he will hint at an inclination to further ease monetary conditions through more bond purchases often called quantitative easing, or continuing the Fed’s current program called Operation Twist, in which its buying longer-dated bonds with proceeds from sales of shorter-term holdings.
His comments “are as dovish as could have been expected,” said David Ader, head of government bond strategy at CRT Capital Group. “An extension of Twist seems increasingly likely. We take special note of his views on the fiscal stuff and so putting only on Washington to do something and his heightened concerns over Europe.”
Analysts and Fed officials have become more worried lately about the trajectory of the U.S. economy, especially after last week’s disappointing payrolls report for May, and as the outlook for Europe’s economy and financial markets remains precarious.
Late Wednesday, Janet Yellen, the No. 2 Fed official behind Bernanke, said the door remains open for more easing of monetary policy, particularly if central bankers are worried about the downside risks to the outlook. See story on Fed’s Yellen.
Earlier Thursday, Treasury prices gained a little after a report showed first-time U.S. jobless claims fell to 377,000 last week, while the prior two weeks of data were revised up. See story on jobless claims.
China, Europe
Yields have risen in recent days from record lows as European policy makers have appeared more open to farther-reaching solutions or more lenient aid, especially for Spain. Read about Treasury selloff.
China’s surprise move Thursday to shore up its own economy boosted investors’ willingness to move back into assets deemed riskier. U.S. stocks opened higher, then pared gains after Bernanke began speaking. The S&P 500 Index SPX +0.49% rose 0.6% after a big rally Wednesday on Wall Street.
“We can be seeing a concerted effort among key central banks around the world to respond in a more aggressive fashion to challenges,” said Kevin Flanagan, chief fixed-income strategist for Morgan Stanley Smith Barney. “Treasurys backed off on the feeling that the worse things get, the more significant the policy response will be here in the U.S. and in Europe.”
But recently, some monetary-policy setters largely seem to be sitting on the sidelines, to see what European governments do about their debt problems and, at the earliest, how the Greek election in a couple of weeks comes out. On Wednesday, the European Central Bank said as much, while on Thursday, the Bank of England kept policy steady. See more on Bank of England.
Deborah Levine is a MarketWatch reporter, based in New York.
