Falling 2-year yields seen as sign of more Fed easing, Nomura says
By Deborah Levine, MarketWatch
NEW YORK (MarketWatch) — Treasury prices erased small losses on Tuesday, leaving yields near record lows, as U.S. stocks extended declines and before the government sells 2-year notes potentially at the lowest yield on record, signalling traders expect more easing from the Federal Reserve.
Yields on 10-year notes 10_YEAR +0.21% , which move inversely to prices, rose as high as 1.46%, before erasing the move to trade at 1.44%. It touched a record low in the previous session.
A basis point is one one-hundredth of a percentage point.
Yields on 30-year bonds 30_YEAR +0.04% were little changed at 2.51%, after also hitting an all-time low Monday.
Yields on 5-year debt 5_YEAR +0.18% were little changed at 0.56%.
The Treasury Department will auction $35 billion in 2-year notes 2_YEAR +3.60% at 1 p.m. Eastern time. See recent Treasury auction results.
The securities yield 0.21%, down 1 basis point on the day and down from 0.31% at last month’s auction.
“The current record low is 22.2 basis points from August last year, during the midst of the U.S. downgrade chaos and surge in the Swiss franc as the [Federal Reserve] pledged to hold rate at zero for several years,” said Richard Gilhooly, U.S. director of interest-rate strategy at TD Securities.
And for foreign investors, or U.S. investors who buy overseas government debt, that yield on the maturity is actually pretty high relative to other countries considered safe.
With the 2-year German shatz DE:2YR_GER +43.33% yielding negative 0.06%, 2-year debt from the Netherlands at 0.03% and a rate of 0.10% on 2-year Japanese government bonds, U.S. 2-year notes, ”with a firming dollar, don’t look half bad,” David Ader and Ian Lyngen, bond strategists at CRT Capital Group, wrote in a note.
The Fed’s new tool
Also, 2-year yields have fallen as traders become more convinced that the Federal Reserve may create more accommodative monetary policy by using one of its newer tools: cutting the interest rate it pays on reserves that banks store at the Fed.
The Fed currently pays banks 0.25% to hold excess reserves — which have grown as banks have found that more lucrative than lending our the funds or buying other assets. But the idea is that if the Fed cuts the interest rate below what banks can earn elsewhere, banks will be more willing to lend the money or move their money into those other assets, including short-term U.S. notes.
“The front-end of the U.S. Treasury curve has rallied strongly reaching year-to-date lows with the possibility of a cut in the interest paid on reserves by the Fed the key driver,” strategists at Nomura Securities wrote in a note.
While they don’t think the Fed will cut the rate to zero, which the market may be pricing in, “the auction may serve as a referendum on the extent of market expectations.”
Two-year yields have fallen 10 basis points this month. That may not sound like much, but with rates so low, its about a 30% drop.
The auction is the first of three this week. The U.S. will auction 5-year notes Wednesday and 7-year notes 7_YEAR -0.11% the following day.
Stocks came under pressure after several core European countries were put at a higher risk of a ratting downgrade and following mixed Chinese and European manufacturing data.
Late Monday, Moody’s Investors Service cut the outlook on Germany’s triple-A rating to negative from stable and lowered its outlook on other northern European countries.
That was followed by positive economic data out of China, where a preliminary reading of HSBC’s manufacturing purchasing-managers index for July was at its strongest level since February. Read full story on China’s PMI.
Markit’s euro-zone PMI was unchanged for July, showing activity continued to shrink. See more on euro zone PMI.
Deborah Levine is a MarketWatch reporter, based in New York.
