BLBG:Treasuries Rise as Pimco Says Summers Withdrawal Is Supportive
Treasuries advanced, with 10-year yields falling by the most in six weeks, after Lawrence Summers withdrew his candidacy to become the next Federal Reserve chairman.
Benchmark notes rose for a fourth day as Pacific Investment Management Co.’s Mohamed El-Erian said the exit of the former Treasury secretary increases the probability of policy continuity at the Fed. “This would be seen as being particularly supportive” to shorter-maturity notes, El-Erian wrote in a commentary on the Business Insider website. Treasury yields will still increase by year-end as the economy improves, according to Societe Generale SA in Paris.
“The market had assumed Summers was going to get the Fed chairmanship and that he would be more hawkish than other potential candidates,” said Peter Jolly, head of market research for National Australia Bank Ltd. in Sydney. “With him stepping aside and withdrawing his candidacy, we’re likely to see bonds rally.”
The U.S. 10-year yield fell eight basis points, or 0.08 percentage point, to 2.81 percent at 7:10 a.m. New York time, according to Bloomberg Bond Trader prices. The 2.5 percent note due in August 2023 rose 21/32, or $6.56 per $1,000 face amount, to 97 11/32. The last time yields dropped so much was Aug. 2.
The additional yield investors receive for holding 30-year bonds over their five-year equivalents increased eight basis points to 222 basis points after reaching 224 basis points, the most since Aug. 22.
Front-Runner
Summers’s withdrawal from the race to replace Fed Chairman Ben S. Bernanke “is significant and is clearly driving a rally in both Treasuries and risk assets,” said Vincent Chaigneau, global head of rates and foreign-exchange strategy at Societe Generale SA in Paris. “We still see yields going up into year-end. We are more positive than consensus on the U.S. economy and that leaves us bearish.”
Fed Vice Chairman Janet Yellen, who had also been mentioned by U.S. President Barack Obama as a candidate for the chairman role, is now the front-runner for the job when Ben S. Bernanke’s term expires in January, El-Erian, Pimco’s chief executive and co-chief investment officer wrote. The Newport Beach, California-based company is a unit of Munich-based insurer Allianz SE (ALV) and runs the world’s biggest bond fund.
The Fed cut its target for overnight bank lending to a range of zero to 0.25 percent in December 2008 as the financial crisis mounted, and has vowed to keep it there until the economy and employment show sustained signs of recovery.
Bearish Bets
Policy makers are buying $85 billion a month of Treasuries and mortgage bonds to put downward pressure on long-term borrowing costs. They will decide to slow purchases to $75 billion at a two-day meeting starting tomorrow, according to a Bloomberg News survey of economists on Sept. 6.
Traders increased their bearish bets, or net short position, in five-year Treasury futures to 128,756 contracts in the week ended Sept. 10 versus 44,917 contracts in the previous week. That was the most bearish since Jan. 29, 2008 according to data from the Chicago Futures Trading Commission.
“The move in Treasuries is a bit excessive,” said Christoph Rieger, head of fixed-rate strategy at Commerzbank AG in Frankfurt. “Large net shorts, in particular in the intermediate part of the Treasury curve, are leading to this gap higher. For today we have suggested tactical shorts,” referring to a bet the securities will decline.
Reducing Stimulus
Speculation the Fed is moving toward reducing bond purchases has seen Treasuries lose 3.8 percent this year through Sept. 13, exceeding the biggest annual declines recorded in Bank of America Merrill Lynch data that go back to 1978.
While speculation the Fed will reduce its bond purchases as soon as this week has left investors with the worst losses since 1994, JPMorgan Chase & Co. financial models show the end to the central bank’s zero-rate policy would have an even bigger impact.
JPMorgan’s model shows the end of all Fed bond buying would lift 10-year note yields by 25 basis points, which the firm says is already priced into the market. If the Fed’s forward guidance was ended, meaning the timing of the first benchmark rate increase was moved forward to today, it would lift yields by 45 basis points, the model indicates.
To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net; Neal Armstrong in London at narmstrong8@bloomberg.net
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net
