Bloomberg News

Treasury Bonds Post Biggest Gain Since ‘08 on Economy, Fed Twist

September 24, 2011

Sept. 24 (Bloomberg) -- Treasury 30-year bonds had their biggest gains in almost three years as investors sought refuge in U.S. government debt amid concern the global economy is on the brink of another recession.

Ten-year note yields dropped to a record yesterday as policy makers worked to contain contagion from the European sovereign debt crisis. Yields on 30-year bonds dropped 41 basis points on the week after the Federal Reserve said on Sept. 21 that it would buy longer-term debt to lower borrowing costs in an initiative known as Operation Twist. The central bank on Sept. 30 will announce its purchase schedule for October.

“Twist will take out as many 30-year bonds as are auctioned each month, so that’s putting downward pressure on yields,” said Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc., one of 20 primary dealers that trade directly with the Fed. “The European situation is not going away.”

Thirty-year yields fell to 2.90 percent yesterday in New York, according to Bloomberg Bond Trader prices, the biggest decline since December 2008. The 3.75 percent bond due August 2041 rose 8 21/32 to 116 29/32.

The 10-year yield dropped to a record low of 1.6714 percent. Treasury 10-year yields have fallen more than 1 percentage point during the past three months.

Treasury Returns

Treasuries have returned 9.8 percent this year compared with 5.9 percent in 2010, according to Bank of America Merrill Lynch Indexes. Ten-year notes have returned 18 percent, while 30-year bonds have returned 36 percent.

The U.S. will sell $99 billion in notes next week, including $35 billion in two-year notes, an equal amount in five-year debt and $29 billion in seven-year securities on three consecutive days starting Sept. 27.

“There are significant downside risks to the economic outlook,” the Fed said in a statement on Sept. 21. The central bank said it will extend the maturities of its Treasury holdings by purchasing $400 billion of long-term debt and selling an equal amount of shorter-term securities.

The operation drew three dissents as Chairman Ben S. Bernanke struggled to find consensus to help an economy plagued by 9.1 percent unemployment.

‘Shock and Awe’

“The Fed gave us a surprise -- a shock and awe that they needed,” said David Ader, head of government bond strategy at Stamford, Connecticut-based CRT Capital Group LLC on Sept. 22.

Operation Twist follows two previous attempts by policy makers to jumpstart the economy by purchasing securities to reduce borrowing costs. In a program known as quantitative easing, the Fed purchased $300 billion in Treasuries in 2009. Fed policy makers said on Nov. 3 the central bank would expand asset purchases through its so-called QE2 program to $600 billion until June.

The central bank also announced a measure to support the mortgage market by reinvesting maturing housing debt into mortgage-backed securities instead of U.S. government debt.

The difference between two- and 10-year Treasury yields narrowed to 1.48 percentage points on an intraday basis Sept. 22, the least since January 2009. The extra yield 30-year bonds offer compared with two-year notes narrowed to 2.54 percentage points, the least since March 2009.

Inflation Measure

The difference in yield between 10-year Treasuries and inflation-protected debt, a measure of the outlook for consumer prices known as the break-even rate, touched 1.67 percentage points Sept. 22, the lowest since September 2010.

Treasuries were also buoyed this week by a flight to safety stemming from concern the European debt crisis may push the continent into a recession. Senior finance officials next week will examine the cost advantages of setting up a permanent rescue fund, known as the European Stability Mechanism, in July 2012, a year ahead of schedule, according to a staff paper prepared for the meetings and obtained by Bloomberg News.

Greece committed to additional measures this week to secure the next payment in its 110 billion-euro ($149 billion) bailout and convince European lawmakers to pass its second bailout worth 159 billion euros. Eight Greek lenders had their credit ratings lowered yesterday by Moody’s Investors Service on concern over their holdings of the nation’s government bonds.

“The market is beginning to ignore the short-term band- aid,” said Charles Comiskey, head of Treasury trading at Bank of Nova Scotia in New York. “It wants real reform. People feel there’s going to be a contagion effect spreading from Europe to the U.S. and the world.”

The International Monetary Fund on Sept. 20 lowered its global growth forecast, citing European turmoil and the potential for an American fiscal impasse.

The world economy will expand 4 percent this year and next, the IMF said, compared with June forecasts of 4.3 percent in 2011 and 4.5 percent in 2012. The U.S. growth projection for 2011 was lowered to 1.5 percent from 2.5 percent.

--Editor: Paul Cox, Greg Storey

To contact the reporters on this story: Susanne Walker in New York at;

To contact the editor responsible for this story: Dave Liedtka at

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