BLBG:Treasuries Set for 2nd Weekly Gain as Bernanke Calms QE Concerns
Treasuries headed for a second weekly gain after Federal Reserve Chairman Ben S. Bernanke quelled concern that a reduction of U.S. stimulus was imminent.
Ten-year note yields slid for a fourth time in five days after Bernanke said yesterday it was “way too early to make any judgment” about starting tapering in September. The previous day, he said the central bank’s quantitative easing is “by no means on a preset course.” Moody’s Investors Service revised the U.S.’s Aaa credit rating outlook to stable from negative. The Treasury sold 10-year inflation-protected securities with a positive yield for the first time in almost two years.
“Clearly, tapering is very dependent on the evolution of the U.S. economy,” said Su-Lin Ong, the head of Australian economic and fixed-income strategy at Royal Bank of Canada in Sydney. “When we do start to move out of this very unconventional policy setting, overall conditions will still remain extremely accommodative and supportive of the economy. We don’t think Treasury yields will back up in a straight line.”
Treasury 10-year yields fell one basis point, or 0.01 percentage point, to 2.52 percent at 8:27 a.m. London time. The 1.75 percent note due in May 2023 rose 1/8, or $1.25 per $1,000 face amount, to 93 3/8.
RBC sees the 10-year yield at 2.85 percent by the end of this year.
The rate on benchmark U.S. government debt has slipped six basis points this week, after dropping 16 basis points in the previous five days, the most since the period ended June 1, 2012. It touched a two-week low of 2.46 percent on July 17.
‘Unwelcome’ Rise
Bernanke said tighter financial conditions as a result of rising yields over the past two months are “unwelcome,” in response to a question from the Senate Banking Committee following his testimony yesterday.
The benchmark 10-year yield surged 81 basis points from the close on May 21, the day before Bernanke said the Fed could trim stimulus in its “next few meetings,” to the close on July 5 after a report that day showed U.S. employers added more jobs than forecast in June.
Bernanke “was quite irritated about the market reaction,” said Akira Takei, the head of the international fixed-income department at Mizuho Asset Management Co. in Tokyo. Since Bernanke’s testimony to Congress, “We have seen stability coming back into the market, so in a sense he has succeeded. The U.S. economy is still in the very early state of recovery.”
Yield Forecasts
U.S. 10-year yields will be between 1.25 and 1.5 percent by year-end, Takei said. That’s a more bullish call on Treasuries than the 2.63 percent level shown by the weighted average forecast in a Bloomberg survey of economists.
Benchmark yields have risen this year as economic indicators signaled improvement in sectors including housing, employment and manufacturing.
Purchases (ETSLTOTL) of previously owned homes rose last month to a 5.27 million annualized rate, which would be the most since November 2009, according to the median estimate of economists surveyed by Bloomberg News before the National Association of Realtors’ report on July 22.
The Commerce Department will say on July 24 that sales of new homes climbed in June to an annualized pace of 481,000 from a 476,000 rate the previous month, a separate survey showed. That would be the most since June 2008.
‘Slow Normalization’
“We continue to see modest downside potential for yields over the next few weeks, reinforcing our near-term bullish bias for Treasuries,” Millan Mulraine, a director of U.S. rates research at TD Securities USA LLC in New York, wrote in an e-mail. “However, as evidence of a more sustained economic rebound begins taking shape later this quarter, we expect the slow normalization in rates to begin in earnest, taking 10-year yields back to 2.60 percent by year-end.”
The Fed is buying $85 billion of Treasuries and mortgage-backed securities a month to put downward pressure on borrowing costs. Investors see a 40 percent chance policy makers will lift the federal funds rate, currently between zero and 0.25 percent, to 0.5 percent or higher by December 2014, compared with 49 percent odds a week ago, data compiled by Bloomberg show. Officials next meet on July 30-31.
Moody’s revised its outlook on the U.S.’s top ranking yesterday, after it had been negative since August 2011. The credit assessor said in a statement yesterday that budget deficits have been falling and are expected to continue to decline over the next few years.
The Treasury auction of $15 billion in 10-year TIPS drew a yield of 0.384 percent, the highest since July 2011 and first above zero since November of that year. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.44, versus the 2.68 average for the past 10 auctions.
The Treasury Department will auction $35 billion of two-year debt, $35 billion of five-year notes and $29 billion of seven-year securities on consecutive days starting on July 23. The government sells this combination of debt every month.
To contact the reporters on this story: Kevin Buckland in Tokyo at kbuckland1@bloomberg.net; Neal Armstrong in London at narmstrong8@bloomberg.net
To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net
