Ten-year yields could fall to 1.75% eventually, RBS says
By Deborah Levine, MarketWatch
NEW YORK (MarketWatch) — Most Treasury prices rose Wednesday, extending the prior day’s steep rally after the Federal Reserve committed to keep rates low for two years and acknowledged the economic recovery is slowing.
Short-term Treasury prices reversed some of the prior day’s steep drop that sent yields to a new record low.
Gains by longer-dated securities came even as sales of new 10-year and 30-year debt are coming up.
Yields on 10-year notes 10_YEAR -4.16% , which move inversely to prices, fell 6 basis points on the day at 2.18%. The yield briefly dropped under 2.04% Tuesday, matching the record low touched in December 2008.
Thirty-year bond yields 30_YEAR -2.73% declined 7 basis points to 3.56%. On Tuesday, they fell to 3.45%, their lowest since January 2009. The government will sell new long bonds on Thursday.
Yields on 5-year 5_YEAR -7.11% and 7-year 7_YEAR -5.64% notes also fell.
Yields on 2-year notes 2_YEAR -12.18% bucked the trend, rising 5 basis points to 0.17%, after reclaiming the lowest level ever under 0.16%.
Analysts expect the gap between short-term and longer-term notes is likely to narrow now that short rates, namely 2-year yields — are anchored by the Fed’s target rate. That makes it more attractive for traders and institutional investors to borrow short and buy longer-dated debt.
“We ‘get’ that the Fed just gave the green light for short paper to trade lower in yield than we thought possible, stay there, and pretty much eliminate front-end volatility,” said strategists at CRT Capital Group. “We get that cheap financing for about 24 months makes the willingness to own slightly longer paper an enticing leveraged trade.”
That could push 10-year yields down to 1.75% at least, according to strategists at RBS Securities.
Treasury prices jumped Tuesday after the Federal Reserve said it will likely hold interest rates low through at least the middle of 2013, clarifying for the first time what an “extended period” is. Read about Treasury rally after Fed.
Benchmark auction coming up
The Treasury Department will sell new 10-year notes at 1 p.m. Eastern time, with the yield on the new securities expected to come at a record low for the government.
But after the massive shift in yields in the last week or so — between worries about European debt, the U.S. debt ceiling and deficit, weak economic data and most recently the Fed statement — some traders may be content to move to the sidelines, at least until volatility in other markets calm down.
“Rates reached and surpassed all our interim re-assess points, so we move to a neutral stance on intermediate rates now that most of our bullish arguments are priced-in,” said bond strategists at Nomura Securities. “Our view on the economy is unchanged and we retain a bullish bias on the long end.”
