Treasuries rose, and yields approached the record low, as Goldman Sachs Group Inc. and other bond-trading firms said the Federal Reserve will add to its debt purchases to support the economy.
U.S. government securities rose for a third day on speculation $66 billion of notes and bonds scheduled for sale this week will hold their haven appeal. Fed Bank of Chicago President Charles Evans said the central bank should move more forcefully to cut unemployment, after the government last week reported an 80,000 June jobs gain that fell short of the 100,000 increase projected by economists in a Bloomberg News survey.
“Everybody wants to buy U.S. Treasuries” as a haven, said Kim Youngsung, the head of fixed income in Seoul at Samsung Asset Management Co., South Korea’s largest private bond investor with the equivalent of $98.8 billion in assets. “The price will go higher.”
Benchmark 10-year yields declined two basis points to 1.53 percent as of 6:52 a.m. in London, according to Bloomberg Bond Trader data. The 1.75 percent security due in May 2022 rose 1/8, or $1.25 per $1,000 face amount, to 101 31/32.
The 10-year rate last week dropped 10 basis points, or 0.10 percentage point. The all-time low yield was 1.44 percent set June 1. The U.S. is scheduled to sell $32 billion of three-year notes tomorrow, $21 billion of 10-year securities the next day and $13 billion of 30-year bonds on July 12.
Fed Pledge
Japan’s 10-year rate was little changed at 0.795 percent after earlier reaching 0.79 percent, matching the least since 2003. The five-year yield also reached the lowest in nine years.
Goldman Sachs and Bank of America Corp. say the Fed’s first step will probably be to pledge to keep its benchmark interest rate at almost zero until the middle of 2015.
The central bank, which has said it will hold the rate low through at least late 2014, will amend its so-called forward guidance before deciding on a new round of bond purchases, according to the companies. Goldman Sachs and Bank of America are two of the 21 primary dealers that trade directly with the central bank.
“The ‘late 2014’ formulation has now ‘aged’ by six months since it was first adopted, but the economy still looks no better,” Jan Hatzius, the chief economist at Goldman Sachs in New York, wrote in a report yesterday. The central bank may announce the change as soon as its next policy meeting July 31 to Aug. 1, Hatzius wrote.
The policy setting Federal Open Market Committee will probably implement a new round of asset purchases when Operation Twist ends, according to Hatzius.
‘Forward Guidance’
Data on retail sales, industrial production and orders for durable goods will determine when the Fed acts, Michelle Meyer and Joshua Dennerlein, economists at Bank of America in New York, wrote in their report July 6.
“The next step is to push out the forward guidance from late-2014 to mid-2015, followed by further asset purchases of $500 billion,” the economists said.
The difference between the Fed’s target for overnight bank lending and five-year yields is shrinking amid forecasts for the central bank to hold borrowing costs down for longer.
The spread has narrowed to 38 basis points from this year’s high of 94 basis points in March. The gap was 37 basis points on June 1, the least since 2008.
The Fed bought $2.3 trillion of securities in two rounds of so-called quantitative easing, known as QE1 and QE2, from 2008 to 2011 to support the economy. In September it embarked on a plan to replace $400 billion of short-maturity Treasuries in its portfolio with longer-term debt to cap long-term borrowing costs. It expanded the effort, known as Operation Twist, on June 20 by $267 billion and extended it until year-end.
‘Act Aggressively’
“Failure to act aggressively now will lower the capacity of the economy for many years to come,” Evans said in the text of remarks today in Bangkok. “I support using our balance sheet to provide additional accommodation.”
Fed Bank of Boston President Eric Rosengren, speaking at the same conference in Bangkok, said a struggling U.S. labor market threatens to slow household spending. The unemployment rate has been more than 8 percent since February 2009. Evans and Rosengren do not vote on monetary policy this year.
Wall Street’s primary dealers are increasingly choosing to hoard their U.S. bonds rather than sell them to the Fed.
Dealers offered an average of $7.2 billion in Treasuries a day to the central bank in June, down 40.5 percent from a high of $12.1 billion in October, data compiled by Bloomberg show.
While the amount of marketable U.S. government debt outstanding has risen to more than $10.5 trillion, Treasuries are proving scarce in a world where five nations in Europe have sought bailouts, the U.S. economy is slowing again and China is weakening. That means interest rates on everything from mortgages to corporate bonds should remain at about record lows.
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
