BLBG:Treasuries Snap Loss as Fed May Highlight Growth Weakness
Treasuries rose, snapping a two-day decline, as economists said the Federal Reserve will today announce a third round of bond purchases known as quantitative easing to spur growth.
Benchmark 10-year yields dropped from near the highest level in three weeks before the U.S. central bank also releases policy makers’ forecasts for unemployment, inflation and the expected path of the federal funds rate over the next several years. Thirty-year bonds advanced before the Treasury sells $13 billion of the securities today.
“Our view is that the Fed will announce additional QE and that would be justified by a weak set of economic data we’ve seen recently,” said Christoph Kind, head of asset allocation at Frankfurt-Trust, which manages about $20 billion. “It makes sense to go long Treasuries into the announcement. We prefer longer-dated Treasuries to shorter maturities.” A long position is a bet an asset will gain.
The 10-year yield fell two basis points, or 0.02 percentage point, to 1.74 percent at 10:33 a.m. in London, according to Bloomberg Bond Trader prices. The 1.625 percent note due August 2022 rose 7/32, or $2.19 per $1,000 face amount, to 99.The yield climbed to 1.77 percent yesterday, the highest since Aug. 22.
The 30-year rate dropped two basis points to 2.91 percent.
The U.S. central bank will announce additional bond purchases, according to almost two-thirds of economists in a Bloomberg survey, while also extending the duration of its zero- interest-rate policy into 2015.
Fed Statement
The Federal Open Market Committee plans to release a statement at about 12:30 p.m. in Washington after a two-day meeting. At 2 p.m. the Fed will release policy makers’ forecasts. Chairman Ben S. Bernanke plans to hold a press conference at about 2:15 p.m.
Global economic growth is poised to decelerate to 2.27 percent this year from 2.87 percent in 2011, based on a Bloomberg News survey.
The 30-year bonds scheduled for sale today yielded 2.91 percent in pre-auction trading, compared with 2.825 percent at the previous sale Aug. 9. Investors bid for 2.41 times the amount of debt offered last month, versus 2.70 in July.
The U.S. auctioned $21 billion of 10-year notes yesterday and $32 billion of three-year debt the day before.
The government is also scheduled to announce today the size of a 10-year sale of Treasury Inflation Protected Securities scheduled for Sept. 20. The auction will be for $13 billion, according to Wrightson ICAP LLC, an economic advisory company in Jersey City, New Jersey, that specializes in government finance.
Treasury Returns
Treasuries fell yesterday as some investors bet Fed efforts to spur the economy will increase demand for stocks.
Investors in U.S. government securities have earned 1.7 percent in 2012 as of yesterday, compared with a 2.1 percent gain from German bonds, according to Bank of America Merrill Lynch indexes. The MSCI All-Country World Index (MXWD) of shares returned 13 percent, including reinvested dividends, according to data compiled by Bloomberg.
Bill Gross, who runs the world’s biggest bond fund, reduced holdings of U.S. Treasuries to the lowest since October while saying that more central bank stimulus will lead to a resurgence of inflation.
Gross cut the proportion of U.S. government and Treasury debt in Pacific Investment Management Co.’s $272 billion Total Return Fund to 21 percent of assets in August, from 33 percent the previous month, according to a report on the Newport Beach, California-based company’s website yesterday. Mortgage assets dropped to 50 percent from 51 percent.
Fed asset purchases aim to “reflate” the economy, Gross wrote on Twitter yesterday.
Best Performer
Ten-year notes have been the best-performing Treasuries this year, returning 3.1 percent, the Bank of America indexes show. Thirty-year bonds, those most vulnerable to inflation because of their long maturity, advanced 1.6 percent.
U.S. producer prices rose 1.2 percent in August from July, based on a Bloomberg survey before the Labor Department reports the figure today. Consumer prices gained 0.6 percent, a separate survey showed before the department issues the data tomorrow. Both numbers would be the most since 2009.
The difference between yields on 10-year notes and same- maturity TIPS, a gauge of trader expectations for consumer prices over the life of the debt, widened to 2.41 percentage points yesterday, the most since March. The spread was 2.39 percentage points today.
Mortgage Bonds
The extra yield investors demand to buy mortgage bonds instead of government securities narrowed to the least in five years this week on speculation the Fed will buy a mix of Treasury notes and mortgage-backed securities.
A Bloomberg index of yields on Fannie Mae-guaranteed mortgage bonds shows the spread narrowed to 1.13 percentage points on Sept. 10, the least since April 2007. The gap was 1.14 percentage points today.
Bond-market yields have “largely priced-in” expectations for Fed debt purchases, Bank of America said yesterday.
If the Fed holds off this month, it will probably issue a statement indicating that easing is likely in the future, according to a report by Michael Hanson, senior U.S. economist, and Priya Misra, head of U.S. rates strategy, in New York.
To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net;
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net
