BLBG:Treasuries Advance Before Bernanke Speaks At Jackson Hole
Treasuries advanced on speculation Federal Reserve Chairman Ben S. Bernanke will use his Aug. 31 speech in Jackson Hole, Wyoming, to outline the case for further central bank action to support the economy.
Bernanke said in a letter last week that the Fed has the ability to take steps to boost growth. The U.S. central bank has already conducted two rounds of bond purchases to pump cash into the banking system under the policy of quantitative easing, programs known as QE1 and QE2. The U.S. Treasury is scheduled to sell $99 billion of notes over three days starting tomorrow.
“For sure they’ll do QE3,” said Ali Jalai, who trades U.S. debt in Singapore at Scotiabank, a unit of Bank of Nova Scotia (BNS), one of the 21 primary dealers authorized to deal with the Fed. “I suspect the economic data aren’t going to get any stronger. Yields could grind a bit lower.”
Benchmark 10-year rates slid two basis points, or 0.02 percentage point, to 1.67 percent as of 3 p.m. in Tokyo, according to Bloomberg Bond Trader data. The price of the 1.625 percent security due in August 2022 climbed 1/8, or $1.25 per $1,000 face amount, to 99 18/32.
The rate declined 12 basis points last week. It touched a record low of 1.38 percent on July 25 and has averaged 3.73 percent for the past decade.
German Bunds
Jalai said he prefers Treasuries over German bunds because the European Central Bank may start buying bonds issued by Italy and Spain to cap borrowing rates in two of the euro area’s most indebted nations, easing demand for the relative safety of German securities.
Ten-year Treasuries yield 33 basis points more than German bonds of similar maturity. The difference may narrow to 10 basis points by the end of the year, Jalai said. The rate on 10-year German debt fell 14 basis points last week.
The yield on Japanese bonds due in 2022 rose 1/2 basis point today to 0.81 percent, climbing for the first time in five days.
The U.S. will auction $35 billion of two-year debt tomorrow, the same amount of five-year notes the following day and $29 billion of seven-year securities on Aug. 30.
Trading of Treasuries was scheduled to close at 3 p.m. Tokyo time and stay shut during London market hours in observance of the U.K. Summer Bank Holiday, according to the New York-based Securities Industry and Financial Markets Association. Trading in New York will take place as usual, the organization’s schedule shows.
“There is scope for further action by the Federal Reserve to ease financial conditions and strengthen the recovery,” Bernanke said in a letter dated Aug. 22 to California Republican Darrell Issa, the chairman of the House Oversight and Government Reform Committee.
Jackson Hole
Bernanke repeated the statement from the Federal Open Market Committee’s Aug. 1 meeting that the Fed will provide “additional accommodation as needed.” He has an opportunity to expand on his views in his speech at the end of the week at the Kansas City Fed’s annual economic symposium in Jackson Hole.
The Fed is currently implementing a program to put downward pressure on borrowing costs by exchanging shorter-maturity Treasuries in its holdings for longer-term debt. It plans to buy as much as $2 billion of securities due from February 2036 to August 2042 today as part of the plan, according to the New York Fed’s website.
Policy makers have said they will keep their target for overnight bank lending near zero at least through late 2014. The Fed will probably amend the pledge to “late 2015” at its Sept. 12-13 meeting, Bank of America Corp. wrote in a report Aug. 24.
Treasury note prices have risen on expectations for the change, Priya Misra and Shyam S. Rajan, interest rate strategists for the company in New York, wrote. “We now recommend reducing exposure” to five-year securities, the report said. The Bank of America unit Merrill Lynch, Pierce, Fenner & Smith Inc. is another primary dealer.
Bullish Positions
Investors from London to Tokyo to Pittsburgh are plowing money back into Treasuries, driving last week’s rebound from the biggest decline in 19 months, as they bet that even an improving global economy won’t ignite a bear market in bonds.
Hedge funds and large speculators raised bullish positions in 10-year Treasury note contracts this month to the highest since March 2008. Yields, which surged to 1.86 percent Aug. 21, sparking the worst investor losses for a four-week period since December 2010, will be little changed by year-end, according to the median forecast of 81 strategists surveyed by Bloomberg.
While employment and retail sales rose last month, U.S. economic growth over the next two years will remain below the 3.2 percent annual average since 1948, according to Bloomberg surveys. Subdued inflation, Europe’s debt turmoil, mandated U.S. spending cuts and tax increases after the presidential election, as well as possible Fed purchases next month are all boosting the allure of bonds.
“We are still in a deflationary, low-growth environment,” Fredrik Nerbrand, global head of asset allocation at London- based HSBC Holdings Plc, said in a telephone interview Aug. 21. “In that environment, Treasuries provide you with stability and a return of capital.”
To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net
To contact the editor responsible for this story: Garfield Reynolds at greynolds1@bloomberg.net.
