BS: Treasuries Advance on Fed Easing Outlook, Falling Stock Markets
Oct. 18 (Bloomberg) -- Treasuries rose, rebounding from their biggest weekly drop this year, on bets the Federal Reserve will step up its asset-purchase program and as falling stocks stoked demand for fixed-income securities.
The advance pushed down 10-year Treasury yields from close to their highest level this month. Federal Reserve Bank of Chicago President Charles Evans said the U.S. needs “much more” monetary accommodation to counter low inflation and high unemployment after Fed Chairman Ben S. Bernanke signaled last week so-called quantitative easing was likely. A report is forecast to show output at factories, mines and utilities in the U.S. increased 0.2 percent for a second month.
“Bernanke gave QE the green light on Friday and Evans is also a supporter,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh. “This week’s data should be bond-market friendly.”
The yield on the benchmark 10-year note fell three basis points to 2.53 percent as of 8:23 a.m. in London, according to data compiled by Bloomberg. The price of the 2.625 percent security due in August 2020 rose 7/32, or $2.19 per $1,000 face amount, to 100 25/32.
The rate earlier today rose to 2.6 percent, the highest since Sept. 27. It increased 17 basis points, or 0.17 percentage point, last week, the most since the period ended Dec. 25.
The Stoxx Europe 600 Index fell 0.3 percent and the MSCI World Index slid 0.4 percent.
Industrial Production
Industrial production expanded 0.2 percent in September, matching August’s figure, which slowed from 0.6 percent in July, according to a Bloomberg News survey of economists before the Fed reports the number today. Manufacturing in the New York region grew in October at a faster pace than anticipated, a central bank report showed last week.
The Treasury is today scheduled to report global demand for U.S. stocks, bonds and other long-term financial assets for August. Net purchases totaled $61.2 billion in July, the most since April.
Evans, speaking at a conference in Boston on Oct. 16, advocated targeting a path for the price level as a way to stop the inflation rate from falling. More accommodation is not a “close call,” he said.
The Boston Fed’s Eric Rosengren said on Oct. 16 that “insuring against the risk of deflation may be much cheaper than” trying to eradicate it after it takes hold.
Inflation Expectations
Bernanke and his fellow policy makers are considering strategies to raise inflation expectations and purchase additional assets to help reduce unemployment persisting at more than 9 percent. The Fed chairman said in a speech opening the Boston conference that there appears to be a “case for further action.” The Fed next meets on Nov. 2-3.
Investors in a survey by Ried Thunberg ICAP Inc., a unit of the world’s largest inter-dealer broker, became less bearish on the outlook for Treasuries through the end of December.
Ried’s sentiment index rose to 47 for the seven days ended Oct. 15 from 45 the week before. A figure less than 50 indicates that investors expect prices to fall.
Treasuries tumbled last week on speculation inflation will pick up as the Fed spurs the economy.
The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, widened to 2.11 percentage points from this year’s low of 1.47 percentage points in August. The figure climbed above the five-year average of 2.10 last week for the first time since May.
U.S. Elections
“I’ve changed my outlook on Treasuries to neutral from bullish,” said Zeal Yin, who invests in dollar-denominated debt in Taipei at Shin Kong Life Insurance Co., Taiwan’s second- largest life insurer with the equivalent of $48.96 billion in assets. “We sold Treasuries last week.”
Bond investors preparing for U.S. elections on Nov. 2 are looking to the last time a Democratic president lost control of Congress and concluding, like then, that gridlock in Washington is good news for Treasuries.
Just as Bill Clinton was forced to abandon spending initiatives after Republicans took over the House and Senate in the 1994 vote, President Barack Obama’s agenda may be constrained as voter concerns over the budget deficit grows. The latest Bloomberg News polls show likely voters favor Republicans.
‘Very Supportive’
With spending held in check, 10-year Treasury yields fell to 5.57 percent by the end of 1995 from 8.03 percent after the November 1994 election while stocks rallied and the Fed cut interest rates as the economy slowed. The Fed is now debating how to bolster growth after reducing benchmark rates to almost zero failed to lower the unemployment rate.
“There are parallels,” said Thomas di Galoma, head of U.S. rates trading at Guggenheim Capital Markets LLC, a New-York based brokerage for institutional investors. “The Republicans will draw a line in the sand about what money can be spent. That’s very supportive of the bond market.”
Obama has increased the publicly traded U.S. debt to a record $8.5 trillion as he seeks to support the economy.
--Editors: Nicholas Reynolds, Mark McCord, Keith Campbell.
To contact the reporters on this story: Matthew Brown in London at mbrown42@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net.
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
