BLBG:Treasury Notes Hold 7-Day Gain on Fed, Inflation
Treasury 10-year notes held a seven-day gain on speculation Federal Reserve efforts to spur the economy will take time and inflation will hold in check.
The U.S. plans to sell $35 billion of five-year debt today in the second of three note auctions this week totaling $99 billion. Bond-market gauges of inflation expectations dropped over the past week, reversing an initial surge triggered by the Fed’s announcement on Sept. 13 that it was expanding stimulus. Fed Bank of Philadelphia President Charles Plosser yesterday said more bond purchases by the central bank probably won’t boost growth.
“The Fed could do additional quantitative easing by buying Treasuries, and long-term inflation will be contained,” said Hideo Shimomura, who helps oversee the equivalent of $77.2 billion in Tokyo as chief fund investor at Mitsubishi UFJ Asset Management Co., which is part of Japan’s largest publicly traded bank. “There’s no consistent improvement in the labor market.”
Benchmark 10-year yields were little changed at 1.66 percent as of 8:19 a.m. London time, according to Bloomberg Bond Trader data. The price of the 1.625 percent security due in August 2022 was 99 21/32.
The record low rate was 1.38 percent set on July 25. Yields may fall to match that level by year-end, Shimomura said.
Ten-year notes and 30-year bonds advanced for a seventh day yesterday. For the so-called long bond, it was the biggest run of gains since the eight days ended Dec. 4, 2008, when investors sought the relative safety of Treasuries as the U.S. economy shrank and credit markets froze. The 30-year yield held at 2.84 percent today.
Inflation Bets
“Every time there’s an action like this, it’s almost like an energy drink,” said Rich Sega, chief investment officer for Conning Inc., which manages almost $87 billion for insurance companies and is based in Hartford, Connecticut. “People get a little ebullient, and then when it wears off, you realize there’s not a fundamental change,” Sega said today on Bloomberg Television’s “First Up” with Zeb Eckert.
The five-year, five-year forward break-even rate, a measure of inflation expectations the Fed uses to help guide monetary policy, was 2.74. It has fallen from 2.88 on Sept. 14, which was the most in 13 months.
Five-year inflation swaps, which allow holders to exchange fixed interest rates for returns equivalent to the U.S. consumer price index, show investors expect prices to rise at an average annual rate of 2.41 percent through September 2017. They have declined from 2.69 on Sept. 17, which was the highest level in more than a year.
Financial Companies
Conning favors investment-grade corporate bonds, especially those issued by financial companies, because yields are attractive, said Sega, who was interviewed in Hong Kong.
U.S. financial-company bonds yielded 1.99 percentage points more than Treasuries, according to Bank of America Merrill Lynch indexes. Investor demand for the corporate securities has narrowed the difference from 3.64 percentage points at the end of last year.
The bonds have returned 12 percent in 2012, the Bank of America Merrill Lynch data show. Five-year Treasuries gained 2.1 percent, about the same as the overall market.
The five-year notes being sold at 1 p.m. New York time today yielded 0.67 percent in pre-auction trading, versus 0.708 percent at the previous sale of the securities on Aug. 29.
Treasury Sales
Investors bid for 2.92 times the amount offered last month, matching the average for the past 10 auctions. The Treasury sold $35 billion of two-year notes yesterday and plans to auction $29 billion of seven-year securities tomorrow.
Treasuries rose yesterday after Plosser said the central bank’s new debt purchases probably won’t boost economic growth.
The U.S. unemployment rate has been more than 8 percent for 43 months. A government report today will probably show sales of new homes in the nation rose to the most in 28 months, based on a Bloomberg News survey of economists before the Commerce Department reports the number at 10 a.m. New York time.
The central bank is swapping shorter-term Treasuries in its holdings with those due in 6 to 30 years to put downward pressure on borrowing costs. It plans to buy as much as $5 billion of debt maturing from September 2018 to August 2020 today as part of the program, according to the Fed Bank of New York’s website. The purchases take place at 11 a.m. in New York.
Chicago Fed President Charles Evans is due to speak in Hammond, Indiana today. In a speech last week in Ann Arbor, Michigan, he said the central bank’s expanded easing has the power to make the U.S. economy more resilient.
To contact the reporter 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
