BLBG:Treasury Yield Falls Most in Two Months as Obama Wins
Treasuries rose, with 10-year yields falling the most in two months, as President Barack Obama’s re- election bolstered speculation the Federal Reserve will stick to its policy of buying bonds to support the economy.
Obama, a Democrat, backs the Fed, which has purchased $2.3 trillion of Treasuries and mortgage-related bonds and instituted plans to purchase $40 billion of home-loan securities a month. Republican challenger Mitt Romney said he wouldn’t reappoint central bank Chairman Ben S. Bernanke to a third term in 2014. The U.S. will sell $24 billion of 10-year notes today.
Obama’s win “reduces the likelihood of earlier tightening,” said Elisabeth Afseth, an analyst at Investec Bank Plc in London. “There may also be a little bit of relief that we haven’t gone into an endless recount scenario and weakened political mandate that would come with that.”
The 10-year yield fell nine basis points, or 0.09 percentage point, to 1.67 percent at 7:13 a.m. in New York, according to Bloomberg Bond Trader prices, the biggest decline since Sept. 7. The 1.625 percent note due in August 2022 rose 25/32, or $7.81 per $1,000 face amount, to 99 5/8. The rate reached 1.66 percent, the lowest level since Oct. 16.
The two-year yield slipped four basis points to 0.27 percent, the least since Oct. 16. The five-year yield declined eight basis points to 0.68 percent.
The 10-year rate will decline to between 1.50 percent and 1.60 percent by year-end, Afseth said.
Obama’s Victory
Obama defeated Romney narrowly in the popular vote, yet achieved an electoral sweep by carrying the crucial states of Colorado, Ohio and Virginia. With Florida too close to call, Obama had captured 303 Electoral College votes, well beyond the 270 needed to win the White House, compared with 206 for Romney.
Ever since Lyndon B. Johnson defeated Barry Goldwater for the presidency in 1964, yields on 10-year Treasuries have dropped about 40 basis points in the first month when a Democrat wins, and risen 19 after a Republican victory, according to data compiled by Bloomberg.
The Fed announced its third round of bond purchases under its quantitative-easing policy, known as QE3, on Sept. 13, saying it will buy agency mortgage-backed securities until the outlook for the labor market improves “substantially.”
‘More Nervous’
“The Romney camp is much more nervous about QE3 and an unconventional Fed than the Obama camp,” Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., said this week. A Romney victory would have created “a lot more uncertainty about monetary policy,” El-Erian said Nov. 5 in an interview with Bloomberg Television’s Maryam Nemazee.
Pimco, based in Newport Beach, California, runs the world’s biggest bond fund.
Treasuries outperformed German bunds after the election with the extra yield investors demand to hold the U.S. securities shrinking four basis points to 27 basis points.
Having won re-election, Obama now faces the job of avoiding the so-called fiscal cliff of more than $600 billion in spending cuts and tax increases scheduled to take effect in January.
U.S. 10-year yields may drop toward 1.40 percent if the fiscal cliff is hit, Bank of America Merrill Lynch strategists led by Ethan S. Harris, the firm’s New York-based co-head of global economic research, wrote today in a note to clients. The yield may rise to 2 percent if it is avoided, they wrote.
Fed Purchases
The Fed is swapping shorter-term Treasuries in its holdings with those due in six to 30 years as part of its efforts to support the economy by putting downward pressure on long-term borrowing costs.
The central bank plans to buy as much as $2.25 billion of Treasuries maturing from February 2036 to August 2042 today, according to the Fed Bank of New York’s website. It is also scheduled to sell as much as $8 billion of debt due from May 2014 to April 2015.
“With Obama winning, we can expect the Fed to carry out current monetary policy,” said Hajime Nagata, who helps oversee the equivalent of $129.4 billion as an investor in Tokyo at Diam Co., a unit of Dai-Ichi Life Insurance Co. “The Fed is committed to a low interest-rate environment. If Romney had won, it would have been a game changer.”
Ten-year yields, benchmarks for mortgages to corporate bonds, have fallen 21 basis points this year. They have tumbled 71 basis points since Obama took office on Jan. 20, 2009. Treasuries have returned 1.8 percent in 2012 and 15 percent since the inauguration, according to Bank of America Merrill Lynch indexes.
The U.S. Treasury sold $32 billion of three-year notes yesterday and is scheduled to conclude this week’s auctions with a $16 billion 30-year bond sale tomorrow.
The previous auction of 2022 Treasuries on Oct. 10 drew bids for 3.26 times the amount of debt offered, versus the average of 3.08 for the previous 10 auctions.
The 10-year notes scheduled for sale today yielded 1.71 percent in pre-auction trading, up from 1.70 percent at a previous sale on Oct. 10. That compares with a record-low auction yield of 1.459 percent on July 11.
To contact the reporters on this story: David Goodman in London at dgoodman28@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net
