Bloomberg News

Treasuries Gain as Bernanke Says Recovery ‘Frustratingly Slow’

June 11, 2011

June 11 (Bloomberg) -- Treasuries rose, pushing two-year note yields down for a ninth week in the longest stretch of decreases since February 2008, on bets the Federal Reserve will maintain monetary stimulus to boost a stalling economy.

Yields on benchmark 10-year notes touched their lowest level this year after Fed Chairman Ben S. Bernanke said on June 7 that the U.S. recovery is “frustratingly slow.” The central bank will continue reinvesting proceeds from agency and mortgage-backed holdings into Treasuries after its $600 billion program of debt buying ends this month.

“Bond market participants are embracing that we are in a low-yield environment,” said George Goncalves, head of interest rate strategy at Nomura Holdings Inc., one of 20 primary dealers that trade directly with the Fed. “The realization that the data has been poor has taken a couple of weeks to sink in. Bernanke rubber-stamped it by saying it’s weaker than we expected.”

Yields on two-year notes dropped three basis points, or 0.03 percentage point, on the week to 0.4 percent, according to Bloomberg Bond Trader prices. The 0.5 percent security maturing in May 2013 increased 2/32, or 63 cents per $1,000 face amount, to 100 6/32.

The two-year yields dropped on June 8 to 0.37 percent, the lowest level since Nov. 8. Yields on 10-year notes decreased two basis points this week to 2.97 percent after touching 2.92 percent on June 9, the lowest level since Dec. 3.

Drop in Stocks

U.S. debt advanced as economic pessimism discouraged demand for higher-yielding assets. The Standard & Poor’s 500 Index fell for a sixth straight week, dropping 2.2 percent. Futures on crude oil slid 1.1 percent to $99.11 a barrel.

“People are nervous about economic growth going forward,” said Gary Pollack, head of fixed-income trading at Deutsche Bank AG’s private wealth management unit in New York. “As a result, the Fed will be on hold for a very long time, so the best place to be now is in U.S. Treasuries.”

Record monetary stimulus is still needed to boost a “frustratingly slow” recovery, Bernanke said this week in Atlanta, reiterating that accelerating 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.

The Fed will buy $50 billion of Treasuries through the end of the month, when a second round of quantitative easing to support the economy concludes. Policy makers are due to meet in Washington on June 21-22.

Fed Rate Outlook

Futures contracts showed yesterday the likelihood of an increase in the Fed funds target by the March 2012 meeting fell to 19 percent, from 24 percent the previous week. The Fed’s target rate for overnight lending between banks has stayed at zero to 0.25 percent since December 2008.

Concerns about the economic recovery bolstered demand at this week’s note auctions. The $32 billion sale of three-year debt June 7 drew the highest demand from a group including foreign central banks since January, while the $21 billion sale of 10-year notes the next day produced a yield of 2.967 percent, the lowest at a sale of the maturity since November. Demand at the $13 billion auction of 30-year bonds on June 9 was below average.

Treasuries have returned 3 percent this quarter, the most since the second quarter of last year, according to a Bank of America Merrill Lynch index.

Dudley’s View

While New York Fed President William C. Dudley said yesterday he expects “a moderate economic recovery to be sustained,” he also said “the recent disappointing data suggest that downside risks to the outlook” have increased.

The economy will probably recover from recent weakness in part because a surge in commodity prices, the March earthquake in Japan and “severe weather” in the U.S. are transitory, Dudley said in Brooklyn, New York. He expects “disappointing” economic growth to improve, even as “downside risks” such as higher commodity prices have increased.

Retail sales in the U.S. dropped 0.4 percent in May after a 0.5 percent increase in the previous month, according to the median forecast in a Bloomberg News survey before a report next week. The consumer-price index increased 0.1 percent last month after a 0.4 percent gain in April, according to a separate Bloomberg News survey.

The difference between yields on 10-year notes and Treasury Inflation Protected Securities of similar maturity, a gauge of trader expectations for consumer prices over the life of the debt known as the break-even rate, dropped this week to 2.16 percentage points, the narrowest since January.

“There’s a lot of bad news being priced into the market,” said Dan Mulholland, a Treasury trader in New York at Royal Bank of Canada, a primary dealer. “We’re setting the bar low for an upward surprise in the data.”

--Editors: Dennis Fitzgerald, Dave Liedtka

To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net

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


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