Bloomberg News

Treasuries Rally on Economic-Slowing Concern, Fed Policy Debate

August 30, 2011

Aug. 30 (Bloomberg) -- Treasuries rose after U.S. consumer confidence plunged in August to the lowest in more than two years, underscoring concern that global growth has slowed and boosting demand for the safest assets.

U.S. debt yields declined as the Federal Reserve released minutes of its Aug. 9 meeting indicating a few policy makers favored more aggressive action to stimulate the economy and lower unemployment. Bill Gross, who runs the world’s largest bond fund, said the global economic crisis is leading to a possible “developed economy” recession in the U.S. and Europe, where consumer sentiment also weakened and bank’s bond holdings came under scrutiny.

“Treasuries are reflecting the continuous negative economic surprises,” said Jay Mueller, who manages about $3 billion of bonds at Wells Fargo Capital Management in Milwaukee. “There was nothing much new in the Fed minutes. However, there is really a difference of opinion on the Fed as to how much dry powder they have left, and even if they can do something, should they given increasing levels of inflation in the market.”

Yields on benchmark 10-year notes dropped seven basis points, or 0.07 percentage point, to 2.19 percent at 3:39 p.m. in New York, according to Bloomberg Bond Trader prices. The 2.125 percent securities maturing in August 2021 rose 19/32, or $5.94 per $1,000 face amount, to 99 22/32. The 10-year note yield slid on Aug. 18 to a record low 1.97 percent.

Yields on 30-year bonds dropped seven basis points to 3.53 percent today. Two-year note yields were little changed at 0.20 percent.

Treasury Returns

Government bonds have returned 2.6 percent in August, the most since the depths of the financial crisis in December 2008, according to a Bank of America Merrill Lynch index. U.S. government debt has returned 6.9 percent this year, outperforming the 4.4 percent drop in the Standard & Poor’s 500 Index.

The Fed officials who sought stronger actions, who weren’t identified, “felt that recent economic developments justified a more substantial move” beyond the pledge adopted at the Aug. 9 meeting of the Federal Open Market Committee to hold its key interest rate at a record low until mid-2013.

The report indicates that Fed officials will more fully debate their options when they meet Sept. 21 for a two-day meeting that was originally scheduled to last one day. Fed officials discussed a range of tools, including buying more government bonds, to bolster the economy. They didn’t come to an agreement on what the Fed’s next step might be should the economy continue to weaken.

Bernanke Speech

U.S. bonds trimmed monthly gains after Fed Chairman Ben S. Bernanke sought in his address on Aug. 26 in Jackson Hole, Wyoming, to reassure investors that economic growth is safe in the long run. While he said the Fed has tools to aid the recovery if needed, he stopped short of indicating that the central bank will undertake a third round of bond purchases.

Treasuries investors remained neutral in the latest week, as a weakened economic outlook and the European debt crisis kept curbed directional bets, according to an Aug. 29 survey by JPMorgan Chase & Co.

About 83 percent of the clients surveyed by the primary dealer were neutral, just less than the 85 percent in the previous week. About 13 percent were short, up from 11 percent of investors betting that the price of the securities would fall the previous week.

“Rates have already priced in a lot of economic weakness,” said Srini Ramaswamy, a JPMorgan strategist in New York, in a phone interview. “Except for the risk from Europe, there would be more investors positioning for higher rates.”

Favored Bonds

Gross, whose company is the world’s biggest manager of bond funds, said he favors investing in Australia, Mexico, Brazil and Canada, along with non-dollar currencies that have strong ties to the Asian continent, Gross, co-chief investment officer and founder of Pimco, reiterated. Treasuries have returned almost 7 percent since February, when Gross eliminated the Total Return Fund’s holding of U.S government securities. He boosted Treasuries to 10 percent of assets in July from 8 percent in June.

The $245 billion Pimco Total Return Fund has lost 1.04 percent in the past month, according to data compiled by Bloomberg. It’s up 3.2 percent this year, trailing almost 70 percent of its peers, Bloomberg data show.

The Conference Board’s index slumped to 44.5, the weakest since April 2009, from a revised 59.2 reading in July, figures from the New York-based private research group showed today. It was the biggest point drop since October 2008. Economists predicted the August gauge would fall to 52, according to the median forecast in a Bloomberg News survey.

Consumer Weakness

“The consumer confidence data was grossly weaker than expectations and consistent with what has been going on with weakening data of late,” said David Ader, head of government bond strategy at Stamford, Connecticut-based CRT Capital Group LLC. “We are back to levels that would be consistent with recessionary levels. Based on this alone, it looks like we are in double-dipping territory and the Treasury market is rallying.”

The S&P/Case-Shiller index of home values in 20 U.S. cities fell 4.5 percent from June 2010, after a 4.6 percent drop in the 12 months ended May that was the biggest since 2009, the group said today in New York. The median forecast of 31 economists surveyed by Bloomberg News projected a 4.6 percent decline.

An index of executive and consumer sentiment in the single- currency region of Europe fell to 98.3 from a revised 103 in July, the European Commission in Brussels said today. That’s the lowest since May 2010. Economists had forecast a decline to 100.2, according to the median of 29 estimates in a Bloomberg News survey.

Some European banks haven’t sufficiently written down the value of Greek government bonds and other “distressed sovereign debt” they own, the International Accounting Standards Board said in a letter published on its website today.

--Editors: Paul Cox, 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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