BLBG:Treasuries Rise Second Day as Pimco Says Fed Won’t Raise Rates
Treasuries advanced for a second day as the manager of the world’s biggest bond fund joined investors betting that the Federal Reserve will maintain stimulus to support the economy.
Benchmark 10-year yields approached the lowest in two weeks after Pacific Investment Management Co. said the Fed won’t tighten monetary policy until 2016 at the earliest. The central bank will buy as much as $1.75 billion of Treasuries today as part of its program to put downward pressure on borrowing costs. Ten-year yields climbed to the highest since August 2011 earlier this month after Fed Chairman Ben S. Bernanke said in June the central bank could reduce asset purchases this year.
“The Treasury (BUSY) market appears to be stabilizing a bit after the recent sharp rise in yields, which was driven by an overreaction to what Bernanke said,” said Padhraic Garvey, head of developed-market debt strategy at ING Groep NV in Amsterdam. “He made it clear it’s all data dependent. While we expect Treasury yields to rise in coming months, there’s a scope for them to fall in the near term.”
The U.S. 10-year yield fell two basis points, or 0.02 percentage point, to 2.47 percent at 7:01 a.m. New York time, according to Bloomberg Bond Trader prices. The 1.75 percent note due in May 2023 rose 5/32, or $1.56 per $1,000 face amount, to 93 25/32. The yield dropped to 2.46 percent on July 17, the lowest level since July 3. since July 3.
The 30-year yield declined two basis points to 3.54 percent, the least since July 5.
Fed Buying
The Fed buys $85 billion of Treasuries and mortgage debt each month as part of its quantitative-easing program to cap borrowing costs. Policy makers have held the benchmark interest-rate target at zero to 0.25 percent since 2008 to support the economy. The central bank will purchase securities maturing between February 2036 and May 2043 today.
Tighter financial conditions as a result of rising yields over the past two months were “unwelcome,” Bernanke said in response to a question from the Senate Banking Committee in Washington on July 18.
“So bonds come out of their coffin & it’s not even Halloween,” Bill Gross, who manages Pimco’s $268 billion Total Return Fund, wrote in a Twitter posting. “Bernanke says follow policy rate & we agree.”
Investors see a 60 percent chance that policy makers will keep the federal funds rate at 0.25 percent or lower by December 2014, according to data compiled by Bloomberg.
‘Few Meetings’
The 10-year yield climbed 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 in June than economists forecast.
Purchases of previously owned homes rose last month to a 5.25 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 releases the report today.
Foreign investors, the bulwark of the U.S. government bond market as it more than doubled in size during the financial crisis, are adding Treasuries at the slowest pace since 2006 amid the worst rout in four years.
Holdings by non-U.S. investors rose 1.9 percent through May, down from 5.2 percent a year ago, data last week showed, as foreigners owned less than 50 percent of Treasuries outstanding for the first time since March 2012. Overseas central banks cut the amount of bonds held for them by the Fed during the second quarter. The Bloomberg U.S. Treasury Bond Index fell 2.4 percent, the most since 2009, after Bernanke said he might slow asset purchases (ETSLTOTL) as the economy improves.
Lower Demand
Diminished demand comes as institutions recalculate their expectations for yields. International buyers had kept pace as the market expanded to $11.4 trillion from $4.4 trillion in 2007, supporting President Barack Obama’s efforts to end the longest recession since the 1930s. The biggest sellers this year are from the Caribbean, the domicile for hundreds of hedge funds that are typically first to react to changes in interest-rate policies.
“If foreign central banks are not an incremental buyer of new Treasuries and the Fed is ‘going to taper, if,’ then the Treasury will have to find another source” of demand, Thomas Atteberry, a Los Angeles-based fund manager at First Pacific Advisors Inc., which manages $24 billion in total assets, said in a July 18 telephone interview. “And that source wants a higher return to commit their money.”
To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Masaki Kondo in Singapore at mkondo3@bloomberg.net
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net
