BLBG:Treasuries Rise After Yellen Says Fed Has Scope To Act
Treasuries rose, snapping a three-day decline, as Federal Reserve Vice Chairman Janet Yellen said a “vulnerable” U.S. economy gives the central bank scope to do more to spur growth.
Ten-year yields fell from a one-week high after Yellen said the Fed may extend its so-called Operation Twist program to lengthen the maturity of its bond holdings or undertake a new round of debt purchases. Europe’s debt crisis and slowing U.S. jobs growth have increased pressure for the central bank to act. Fed Chairman Ben S. Bernanke is scheduled to testify on the outlook for the economy in Congress today.
The benchmark 10-year yield fell four basis points, or 0.04 percentage point, to 1.62 percent at 8:08 a.m. London time, according to Bloomberg Bond Trader prices. The 1.75 percent note due in May 2022 rose 11/32, or $3.44 per $1,000 face amount, to 101 5/32. The yield declined to an all-time low of 1.4387 percent on June 1.
The economy “remains vulnerable to setbacks,” Yellen said in the text of remarks given in Boston yesterday. “I am convinced that scope remains for the FOMC to provide further policy accommodation.”
Yellen said the Fed could boost the economy “either through its forward guidance or additional balance-sheet actions.” The Fed has said interest rates are likely to stay “exceptionally low” at least through late 2014.
Likely Weaker
Using communications about the expected path of interest rates is “likely to be weaker the longer the horizon of the guidance, implying that it may be difficult to provide much more stimulus through this channel,” Yellen said.
The policy-setting Federal Open Market Committee meets June 19 to June 20.
Two regional Fed presidents who vote on policy this year, San Francisco’s John Williams and Atlanta’s Dennis Lockhart, said yesterday the central bank should be prepared to take action if the economy deteriorates.
“I’m relatively bullish on Treasuries,” said Masazumi Fukuoka, a senior dealer at the Singapore branch of Mitsubishi UFJ Trust & Banking Corp., a unit of Japan’s largest publicly traded lender. “There may be an extension of Operation Twist. The Europe problems have not been solved and the recovery in the U.S. is very sluggish.”
Fukuoka said he’d consider buying if the 10-year yield climbs to 1.8 percent.
Quantitative Easing
The U.S. economy probably hasn’t weakened enough for the Fed to implement another program of outright purchases, he said. The central bank bought $2.3 trillion of bonds in two rounds of so-called quantitative easing from 2008 through 2011.
Treasuries declined yesterday when European Central Bank President Mario Draghi said officials were ready to add more stimulus to the euro bloc’s economy if necessary, curtailing demand for the relative safety of U.S. debt.
The central bank is scheduled to sell as much as $8.75 billion of Treasuries maturing from December 2013 to February 2014 today as part of Operation Twist, according to the Fed Bank of New York’s website.
“We think that another QE is quite possible going forward, but also think that the FOMC will want to keep the heavy ammo of another QE in reserve,” Ward McCarthy and Thomas Simons, economists at Jefferies & Co. in New York, wrote in a report yesterday before Yellen’s comments. “Chairman Bernanke will neither pre-commit nor rule anything out,” when he speaks today, according to Jefferies, one of the 21 primary dealers that trade directly with the Fed.
Debt Sales
The Treasury is scheduled to announce today the size of three auctions scheduled for next week.
The U.S. will sell $32 billion of three-year notes, $21 billion of 10-year securities and $13 billion of the 30-year bonds over three days starting on June 12, according to Wrightson ICAP LLC, an economic advisory company in Jersey City, New Jersey.
A government report today will show initial claims for jobless insurance declined last week, according to a Bloomberg News survey of economists.
Yields indicate investors expect inflation to hold in check in the U.S., providing Bernanke the room for additional stimulus, with the central bank’s current effort scheduled to end this month.
The difference in yields between 10-year notes and Treasury Inflation Protected Securities, which represents traders’ expectations for the rate of inflation over the life of the bonds, shrank to 2.16 percentage points from this year’s high of 2.45 percentage points in March. The average over the past decade is 2.15 percentage points.
A measure of inflation expectations used by the Fed to set policy, the five-year, five-year forward break-even rate, was 2.56 percent, versus the decade-long average of 2.75 percent.
U.S. inflation slowed in April to the least since February 2011, the Labor Department said May 15. The consumer price index rose 2.3 percent from a year earlier, down from 2.7 percent the previous month.
To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
