Bloomberg News

Treasury 10-Year Yields Stay Below 3% as Fed Avoids New Stimulus

June 22, 2011

June 22 (Bloomberg) -- Treasury 10-year note yields stayed below 3 percent for sixth day as the Federal Reserve refrained from signaling more monetary stimulus, saying it would let asset purchases end.

U.S. debt fluctuated after the central bank lowered its forecasts for growth and employment for this year and 2012. Fed Chairman Ben S. Bernanke said at a press conference that the “extended period” of very low interest rates means at least two to three central bank policy meetings and could be “significantly” longer.

“It seems that the market came off as he put the possibility of QE3 to bed,” said Sean Murphy, a trader in New York at Societe Generale, one of the 20 primary dealers that deal directly with the central bank. “The Fed is not as dovish as feared initially. It’s a slight bit more of a hawkish tone.”

The yield on the 10-year note was little changed from yesterday’s closing price at 2.98 percent at 5:20 p.m. in New York, according to Bloomberg Bond Trader prices. The 3.125 percent security maturing in May 2021 closed at 101 6/32. The 10-year note yield fell on June 16 to 2.88 percent, the lowest level since December.

The Fed said its $600 billion program of debt purchases, known as QE2 for the second round of quantitative easing, will end this month as scheduled. The central bank will maintain its existing policy of reinvesting principal payments from its securities holdings.

“The economic recovery is continuing at a moderate pace, though somewhat more slowly than the committee had expected,” the Fed said today in its statement following a two-day meeting in Washington.

Gross’s View

Pacific Investment Management Co.’s Bill Gross, manager of the world’s biggest bond fund, said in a Twitter posting that the Fed may hint in August of plans for additional monetary stimulus.

“Next Jackson Hole in August will likely hint at QE3/interest rate caps,” wrote Gross, referring to the annual symposium in Jackson Hole, Wyoming.

The central bank held its target rate for overnight lending between banks at zero to 0.25 percent, matching the forecast of all except one of the 87 economists in a Bloomberg News survey. The benchmark has stayed at that level since December 2008.

Fed governors and regional-bank presidents now say the U.S. economy will expand by 2.7 percent to 2.9 percent this year, down from April’s forecasts of 3.1 percent to 3.3 percent, based on the median range of projections. Growth in 2012 will range from 3.3 percent to 3.7 percent, compared with forecasts of 3.5 percent to 4.2 percent in April, the Fed said.

Unemployment Outlook

Central bankers raised their forecast range for the U.S. unemployment rate to average 8.6 percent to 8.9 percent in the fourth quarter of 2011, compared with projections of 8.4 percent to 8.7 percent in April. For the fourth quarter of 2012, the rate will average 7.8 percent to 8.2 percent, versus prior forecasts of 7.6 percent to 7.9 percent.

The jobless rate rose to 9.1 percent, the Labor Department said June 3. Retail sales dropped for the first time in 11 months, and manufacturing grew at the slowest pace since September 2009, other reports showed.

The central bank can take additional actions to stimulate the economy “if conditions warranted,” Bernanke said today at the press conference.

Potential tools, which have risks or costs, include additional securities purchases or a reduction in the interest rate on excess bank reserves, Bernanke said.

“The market move is more about what Bernanke didn’t say,” said Russ Certo, a managing director and co-head of rates trading at Gleacher & Co. in New York. “There was a Bernanke QE3 risk, and there hasn’t been any explicit mention of that or anything out of the ordinary.”

Fed’s Balance Sheet

The central bank will sustain its balance sheet at current levels until October or later, according to 79 percent of 58 economists in a Bloomberg News survey last week.

Yields on 10-year notes increased five basis points on April 27, when the Fed said it would finish purchases of debt in June. Yields stayed lower after the central bank’s March 15 statement as Japan’s earthquake and tsunami four days earlier spurred demand for a refuge.

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for the annual increase in consumer prices over the life of the securities known as the break-even rate, was 2.17 percentage points, down from a 2011 high of 2.67 percentage points.

The U.S. will sell $7 billion at a 30-year TIPS auction tomorrow. At the last sale of the securities on Feb. 17, the U.S. sold $9 billion at a yield of 2.19 percent. Treasuries rose earlier on concern Greece may not be able to pass budget cuts to secure a loan payment after parliamentary vote of confidence.

A total of 155 lawmakers supported the motion in the 300- seat parliament in Athens, with 143 voting against. Papandreou now turns his attention to clinching parliamentary approval next week of a 78 billion-euro ($112 billion) package of budget cuts to stave off default.

--With assistance from Liz McCormick in New York. Editors: Dennis Fitzgerald, Dave Liedtka

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