BLBG: Treasury Two-Year Yields Hold Near Week Low on Fed Before Housing Report
Treasury two-year note yields were near the lowest level in a week on the prospects of more quantitative easing by the Federal Reserve before a report forecast to show U.S. housing starts fell in September.
The cost of hedging against losses on U.S. government debt dropped to the lowest in two months as investors bet the Fed will increase purchases Treasuries at its Nov. 2-3 meeting to spur the economy. Fed Chairman Ben S. Bernanke said last week that additional monetary stimulus may be warranted because inflation is too low and unemployment is too high.
“Everyone is focused on the next Fed meeting,” said Michael Rottmann, head of fixed-income research at UniCredit SpA in Munich. “Data before then may add to speculation about the size of QE, but we won’t know until they tell us what they’re thinking.”
The yield on the 2-year note fell less than one basis point, or 0.01 percentage point, to 0.36 percent at 7:19 a.m. in New York, according to BGCantor Market Data. The price of the 0.375 percent security maturing in September 2012 increased less than 1/32, or 31 cents per $1,000 face amount, to 100 1/32.
The 2-year yield dropped earlier to 0.35 percent, the lowest level since Oct. 12, when it touched the record low of 0.3270 percent. The benchmark 10-year note yield was little changed at 2.51 percent. The yield slid five basis points yesterday in the biggest decrease since Oct. 6.
Housing starts fell 3 percent in September after a gain of 10.5 percent in the previous month, according to the median forecast of 71 economists in a Bloomberg News survey. The report from the Commerce Department is due at 8:30 a.m. in New York.
Bernanke’s View
Bernanke said on Oct. 15 at a Boston Fed conference that “there would appear -- all else being equal -- to be a case for further action.” The central bank may expand asset purchases or change the language in its statement, he said.
“In the wake of Mr. Bernanke’s clear and unambiguous speech in Boston on Friday, it would now be a huge surprise if the Fed chose not to announce” a round of Treasury purchases, Ian Shepherdson, chief U.S. economist at High Frequency Economists Ltd., wrote to clients yesterday. The company, based in Valhalla, New York, provides economic analysis to institutional investors.
Credit-default swaps on U.S. debt fell to 36.7 basis points yesterday, the lowest level since Aug. 5, according to the data provider CMA.
The swaps pay the buyer face value if a borrower fails to meet its obligations, minus the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
Outlook for Fed
The Fed will probably announce $1 trillion of Treasury purchases at its meeting next month, said Geoff Howie, a senior vice president at MF Global Singapore Ltd., part of the world’s largest broker of exchange-traded futures and options.
Longer-maturity bonds will lag behind their shorter counterparts because the Fed purchases will raise inflation concern, David Woo and Priya Misra at Bank of America Merrill Lynch in New York wrote in a report.
The central bank will probably focus its purchases on notes due in two to six years because of the availability of Treasuries in those maturities, according to the report distributed in the U.S. yesterday.
Greater demand for notes over long bonds has increased the spread between 5- and 30-year yields to 2.83 percentage points, the most since Bloomberg data began tracking the figure. The result is a steepening of the Treasury yield curve.
‘More’ Steepening
“More 5s-30s steepening is ahead,” according to Bank of America, one of 18 primary dealers of U.S. securities that trade directly with the Fed.
The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for inflation, has widened to 2.09 percentage points from this year’s low of 1.47 percent set in August.
Treasuries rose yesterday as a central bank report showed U.S. industrial production unexpectedly slid last month, supporting the case for the Fed to increase quantitative easing.
“The overriding factor in this market is the anticipation of asset purchases by the Fed,” said Larry Milstein, managing director of government and agency debt trading in New York at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors.
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
