Bloomberg News

Treasuries Climb Before Auction as Bernanke Says Stimulus Needed

June 08, 2011

June 8 (Bloomberg) -- Treasuries rose, pushing two-year note yields to the lowest level this year, as Federal Reserve Chairman Ben S. Bernanke said yesterday record monetary stimulus is still needed to support the economic recovery.

Yields on 10-year notes fell before the government’s $21 billion auction of the securities today and a $13 billion offering of 30-year securities tomorrow. The extra yield investors demand to hold long bonds instead of 2-year debt was almost the highest since March on speculation interest rates will stay low.

“Bernanke’s comments were supportive of the bullish trend in yields as he pointed out that the economy will continue to languish unless we see marked improvement on the jobs front,” said Martin Mitchell, head government bond trader in Baltimore at Stifel Nicolaus & Co., a brokerage firm. “There was no endorsement of QE3, which is putting pressure on risk assets and supporting Treasuries.”

Yields on 10-year notes dropped three basis points, or 0.03 percentage point, to 2.97 percent at 11:07 a.m. in New York, according to Bloomberg Bond Trader prices. The 3.125 percent securities maturing in May 2021 increased 1/4, or $2.50 per $1,000 face amount, to 101 11/32.

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 after touching 0.39 percent, the lowest since Nov. 9. The yields on 30-year bonds dropped four basis points to 4.22 percent.

The difference in yield between 2- and 30-year debt was 3.83 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 with factories in Japan recovering from the March earthquake and tsunami. The Fed’s Beige Book regional survey of the economy is due at 2 p.m. New York time.

World Bank’s View

The World Bank lowered its growth forecast for the global economy this year to 3.2 percent from a January estimate of 3.3 percent to reflect Japan’s earthquake and political unrest in the Middle East and North Africa. The Washington-based lender left unchanged a prediction for a global rebound in growth to 3.6 percent in 2012.

Futures contracts showed the likelihood of an increase in the fed funds target by the March 2012 meeting fell to 22 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 purchased $6.4 billion of debt maturing from July 2015 to May 2016 today under its $600 billion second round of quantitative easing. The program, also known as QE2, expires this month.

U.S. employers added less than a third of 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.

‘Another Dip’

“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. “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.”

Treasury 10-year notes yielded less than the annual inflation rate of 3.2 percent, 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.

Before today’s 10-year note sale, the securities yielded 2.98 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, 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.

--With assistance from Garth Theunissen in London. Editors: Dennis Fitzgerald

To contact the reporter on this story: Cordell Eddings in New York at ceddings@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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