Bloomberg News

Treasuries Advance as Bernanke Says Record Stimulus Still Needed

June 08, 2011

June 8 (Bloomberg) -- Treasuries rose as Federal Reserve Chairman Ben S. Bernanke said record monetary stimulus is still needed to support the economic recovery.

Yields on 10-year notes fell toward this year’s low before the government’s $21 billion auction of the securities today and a $13 billion offering of 30-year bonds tomorrow. The extra yield investors demand to hold 30-year securities instead of two-year debt was almost the highest since March on speculation the central bank will keep borrowing costs low.

“Bernanke’s comments yesterday were on the dovish side,” said Orlando Green, a fixed-income strategist at Credit Agricole SA in London. “There’s been a move higher in Treasuries as U.S. markets opened.”

Yields on 10-year notes dropped two basis points, or 0.02 percentage point, to 2.97 percent at 7:49 a.m. in New York, according to Bloomberg Bond Trader prices. The 3.125 percent securities maturing in May 2021 increased 6/32, or $1.88 per $1,000 face amount, to 101 9/32.

The 10-year note yields fell on June 1 to 2.94 percent, the lowest level since Dec. 7. Two-year note yields slid one basis point to 0.40 percent today. The yields on 30-year bonds dropped three basis points to 4.23 percent.

The difference in yield between two- and 30-year debt was 3.84 percentage points after increasing yesterday to 3.85 percentage points, the widest since March.

‘Frustratingly Slow’

Record monetary stimulus is still needed to boost a “frustratingly slow” recovery, said Bernanke at an Atlanta conference yesterday, reiterating that a rise in inflation is likely to prove temporary.

“The economy is still producing at levels well below its potential; consequently, accommodative monetary policies are still needed,” Bernanke said. At the same time, the Fed “will take whatever actions are necessary to keep inflation well controlled,” he said.

Bernanke said growth is likely to pick up in the second half of the year as fuel prices recede and disruptions of parts supplies dissipate as factories in Japan recover from the March earthquake and tsunami.

Futures contracts showed the likelihood of an increase in the Fed funds target by the March 2012 meeting fell to 23 percent, from 38 percent odds a month ago. The target rate for overnight lending between banks has been zero to 0.25 percent since December 2008.

The Fed plans to purchase $5 billion to $7 billion of debt maturing from June 2015 to November 2016 today under its $600 billion second round of quantitative easing. The program, also known as QE2, expires this month.

U.S. Payrolls

U.S. employers added less than a third the number of workers in May than economists forecast, and the jobless rate rose to 9.1 percent from 9 percent, the Labor Department reported last week.

“The general sense in the market is that there’s going to be another dip in economic growth and that we might need QE3,” said Mark Schofield, head of interest-rate strategy at Citigroup Inc. in London. “The market is still very jumpy. You’ve got a lot of people talking up every reason to buy. We’re still in the camp that the economy is recovering and that yields are headed higher toward the end of the year.”

Before today’s 10-year note sale, the securities yielded 2.99 percent in pre-auction trading, compared with 3.21 percent at the previous offering May 11. Investors bid for 3 times the amount on offer last month, compared with an average of 3.09 for the past 10 sales.

Indirect Bidders

Indirect bidders, the category of investors that includes foreign central banks, purchased 47.2 percent of the notes last month, versus the 10-sale average of 51.1 percent.

Yesterday’s $32 billion auction of three-year notes drew the highest demand from a group including foreign central banks since January.

U.S. 10-year notes yielded less than the annual inflation rate, with the so-called real yield at negative 19 basis points.

“We’re getting a bit stretched given that the real yield is quite negative,” said Warren Potter, a bond portfolio manager at AMP Capital Investors in Wellington, New Zealand. Yields can remain near current levels “until we see some firming in the economic data,” he said.

Yields on 10-year notes will be at 3.75 percent by the end of the year, according to Peter Jolly, the Sydney-based head of market research at the investment-banking unit of National Australia Bank Ltd., the country’s largest lender by assets.

“Yields here are too low,” said Jolly, who expects the U.S. economy to grow more strongly in the second half. “The news is going to have to get much, much more negative for yields to go lower.”

--Editors: Dennis Fitzgerald, Paul Cox

To contact the reporter on this story: Garth Theunissen in London gtheunissen@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net


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