BLBG:Treasuries Advance Fourth Day After Bernanke Flags Accommodation
Treasury 10-year notes advanced for a fourth day after Federal Reserve Chairman Ben S. Bernanke assured lawmakers he is prepared to maintain the central bank’s stimulus program if growth misses expectations.
Benchmark yields approached a two-week low after Bernanke said yesterday the Fed’s bond purchases could be reduced more quickly or expanded as economic conditions warrant. The yield reached 2.75 percent on July 8, the highest in two years. The underperformance of U.S. debt may be over, according to BlackRock International Limited. The Treasury is scheduled to sell inflation-protected securities maturing in 2023 today.
“The message from Bernanke was clearly dovish,” said Patrick Jacq, a senior rates strategist at BNP Paribas SA in Paris. “The Fed was concerned by the sharp rise in yields. It makes sense to see a further limited rally. Yields can fall to the 2.40 percent area.”
Treasury 10-year yields fell two basis points, or 0.02 percentage point, to 2.47 percent as of 6:58 a.m. New York time after reaching 2.46 percent yesterday, the lowest since July 3. The rate declined nine basis points in the previous three days. The 1.75 percent note due in May 2023 rose 5/32, or $1.56 per $1,000 face amount, to 93 23/32. The 30-year bond yield dropped one basis point to 3.56 percent.
Yields Fall
Treasury 10-year yields have fallen for eight out of the past nine days, erasing their 24-basis point advance on July 5 when a report showed U.S. employers added more jobs than expected in June.
The Fed could keep buying bonds for longer if “financial conditions -- which have tightened recently -- were judged to be insufficiently accommodative to allow us to attain our mandated objectives,” Bernanke said yesterday in testimony to the House Financial Services Committee. He will speak to lawmakers in the Senate today.
U.S. bonds may have stopped underperforming their peers, according to Benjamin Brodsky, global head of fixed-income asset allocation and emerging markets at BlackRock in London.
The yield difference, or spread, of Treasury 10-year notes over their German equivalents was at 96 basis points today after touching 105 basis points on July 15, the most since 2006.
“The underperformance of U.S. rates may have ended,” Brodsky said at a briefing in London. “We still believe that they are expensive, and the Fed will want to keep it expensive.”
Inflation Expectations
The difference in yield between 30-year notes and similar-maturity Treasury Inflation Protected Securities, a measure of trader expectations for inflation over the life of the debt called the break-even rate, was at 2.28 percentage points, set for the highest close since June 4. That compares with an average of 2.42 percentage points in the past year.
The Treasury is scheduled to sell $15 billion of 10-year TIPS. It last sold the debt on May 23 at a yield of minus 0.225 percent when investors bid for 2.52 times the amount of securities on offer.
At their most recent meeting last month, members of the Federal Open Market Committee decided to maintain purchases of Treasuries and mortgage-backed securities at a rate of $85 billion a month as part of a policy known as quantitative easing, and kept the central bank’s benchmark rate at between zero and 0.25 percent.
As of yesterday, investors saw a 40 percent chance policy makers will raise the federal funds rate to 0.5 percent or higher by the end of 2014. That compared with 53 percent odds on July 10, according to data compiled by Bloomberg.
Jobless Claims
First-time claims for jobless benefits in the U.S. fell to 345,000 in the week through July 13 from a two-month high of 360,000 in the previous period, economists surveyed by Bloomberg News said before today’s report. Continuing claims are forecast to drop to 2.96 million in the period ended July 6 from 2.98 million a week earlier.
A separate report will show the Fed Bank of Philadelphia’s general economic index slowed to 8 this month from a two-year high of 12.5 in June. Readings greater than zero signal expansion in the area, which covers eastern Pennsylvania, southern New Jersey and Delaware.
The Treasury Department is due to announce today the size of two-, five- and seven-year auctions scheduled for sale over three days starting July 23. It will offer $35 billion of two-year debt, $35 billion of five-year notes and $29 billion of seven-year securities, according to Stone & McCarthy Research Associates, an economic advisory company in Princeton, New Jersey. The government sells this combination of debt every month.
Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, rose 42 percent yesterday to $364 billion, the most since July 5. The 2013 average is $320.4 billion. Volatility in Treasuries as measured by the Merrill Lynch Option Volatility Estimate MOVE Index was 81.92 yesterday, the lowest level in a month.
To contact the reporter on this story: Neal Armstrong in London at narmstrong8@bloomberg.net
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net
