BLBG:Treasuries Head for Biggest Gain in a Week on Obama Win
Treasuries rose, pushing 10-year yields down the most in a week, as President Barack Obama’s re- election bolstered expectations the Federal Reserve will stick to its policy of buying bonds to support the economy.
Obama, a Democrat, backs the Fed, which has purchased $2.3 trillion of Treasuries and mortgage-related bonds and instituted plans to purchase $40 billion of home-loan securities a month. Republican challenger Mitt Romney said he wouldn’t reappoint Fed Chairman Ben S. Bernanke to a third term in 2014. The U.S. is scheduled to sell $24 billion of 10-year notes today.
“With Obama winning, we can expect the Fed to carry out current monetary policy,” said Hajime Nagata, who helps oversee the equivalent of $129.4 billion as an investor in Tokyo at Diam Co., a unit of Dai-ichi Life Insurance Co., Japan’s second- biggest life insurer. “The Fed is committed to a low interest- rate environment. If Romney had won, it would have been a game changer.”
U.S. 10-year yields slid six basis points, or 0.06 percentage point, to 1.69 percent as of 9:21 a.m. London time, according to Bloomberg Bond Trader prices, set for the biggest fall based on closing prices since Oct. 26. The 1.625 percent security due in August 2022 climbed 17/32, or $5.31 per $1,000 face amount, to 99 3/8, The rate climbed seven basis points yesterday, the most since Oct. 17 on a closing basis.
The two-year note yield dropped three basis points to 0.27 percent. That’s the biggest fall since Aug. 31 and the lowest level since Oct. 17. Five-year rates declined as much as seven basis points, the most since Sept. 7.
Election History
Ever since Lyndon B. Johnson defeated Barry Goldwater for the presidency in 1964, yields on 10-year Treasuries have dropped about 40 basis points in the first month when a Democrat wins, and risen 19 after a Republican victory, according to data compiled by Bloomberg.
The central bank announced its third round of bond purchases under its quantitative easing policy, known as QE3, on Sept. 13, saying it will buy agency mortgage-backed securities until the outlook for the labor market improves “substantially.”
“The Romney camp is much more nervous about QE3 and an unconventional Fed than the Obama camp,” Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., said this week. A Romney victory would have created “a lot more uncertainty about monetary policy,” El-Erian said Nov. 5 in an interview with Bloomberg Television’s Maryam Nemazee.
Pimco, based in Newport Beach, California, runs the world’s biggest bond fund.
Fiscal Cliff
Obama faces the job of avoiding the so-called fiscal cliff of more than $600 billion in spending cuts and tax increases scheduled to take effect in January.
U.S. 10-year yields may drop toward 1.4 percent if the fiscal cliff is hit, Bank of America Merrill Lynch strategists led by Ethan S. Harris, the firm’s New York-based co-head of global economic research, wrote today in a note to clients. The rate may rise to 2 percent if it is avoided, the analysts wrote.
The 10-year rate fell to a record low of 1.38 percent on July 25.
The Fed is also swapping shorter-term Treasuries in its holdings with those due in six to 30 years as part of its efforts to support the economy by putting downward pressure on long-term borrowing costs.
Fed Action
The central bank plans to buy as much as $2.25 billion of Treasuries maturing from February 2036 to August 2042 today, according to the Fed Bank of New York’s website. It is also scheduled to sell as much as $8 billion of debt due from May 2014 to April 2015, the website showed.
Ten-year yields, benchmarks for mortgages to corporate bonds, have fallen 18 basis points this year. They have tumbled 68 basis points since Obama took office on Jan. 20, 2009. Treasuries have returned 1.8 percent in 2012 and 15 percent since the inauguration, according to Bank of America Merrill Lynch indexes.
Greek Prime Minister Antonis Samaras faces a test of his coalition government today as he seeks parliamentary approval of austerity measures to unlock bailout funds amid the third general strike in six weeks and defections from his three-party coalition.
The U.S. Treasury Department sold $32 billion of three-year notes yesterday and is scheduled to conclude this week’s auctions with a $16 billion 30-year bond sale tomorrow.
The last auction of 2022 Treasuries on Oct. 10 drew bids for 3.26 times the amount of debt offered, versus the average of 3.08 for the previous 10 auctions.
The 10-year notes scheduled for sale today yielded 1.74 percent in pre-auction trading, up from 1.70 percent at a previous sale on Oct. 10. That compares with a record-low auction yield of 1.459 percent on July 11.
To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net; David Goodman in London at dgoodman28@bloomberg.net
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net
