Bloomberg News

Treasuries Post Biggest Quarterly Rally Since 2008 as Refuge

September 30, 2011

Sept. 30 (Bloomberg) -- Treasuries rose, extending their biggest quarterly advance since the depths of the financial crisis in 2008, on concern Europe’s sovereign-debt turmoil and a sluggish U.S. economy will undermine the global recovery.

Thirty-year bonds led gains after the Federal Reserve said it will buy about $44 billion of longer-term securities and sell the same amount of shorter maturities over the next month under the stimulus program known as Operation Twist. Traders cut bets on inflation after a report showed consumer spending rose at a slower pace in August.

“There is a sense in the Treasury market that lower growth and a deflationary outcome is the base-case scenario,” said Dan Greenhaus, chief global strategist at BTIG LLC in New York. “With central banks moving toward more accommodative positions, there is little impetus for rates to rise, maybe for years.”

Yields on 30-year bonds fell 14 basis points, or 0.14 percentage point, to 2.92 percent at 5:09 p.m. in New York, according to Bloomberg Bond Trader prices. The 3.75 percent securities due in August 2041 increased 3, or $30 per $1,000 face amount, to 116 18/8. The yields rose about two basis points on the week.

The Standard & Poor’s 500 Index tumbled 2.5 percent today. The Stoxx 600 Europe Index slid 1.2 percent. Crude oil for November delivery dropped 4.2 percent to $78.67 a barrel.

Ten-year yields slid eight basis points to 1.92 percent, falling for the first time in six days. They touched 1.6714 percent on Sept. 23, the lowest in Fed figures beginning in 1953. Two-year yields slid two basis points to 0.24 percent.

Twist Announcement

Thirty-year yields tumbled 146 basis points over the past three months, the biggest quarterly reduction since the period ended December 2008. Two-year note yields fell 22 basis points.

Yields on 30-year bonds tumbled 41 basis points during the week including Sept. 21, when the Fed announced it would buy $400 billion of U.S. debt with maturities of six to 30 years through June while selling an equal amount of securities due in three years or less. The central bank said it aims to stimulate the economy by keeping borrowing costs lower.

Purchases will begin Oct. 3 with the acquisition of $2.25 billion to $2.75 billion of Treasuries maturing between February 2036 and August 2041, according to a statement today from the New York Fed.

The next two days the central bank will purchase $4.25 billion to $5 billion of notes maturing between November 2019 and August 2021 and $1 billion to $1.5 billion of inflation- indexed debt due between January 2018 and February 2041. The Fed is scheduled on Oct. 6 to sell $8 billion to $9 billion of securities due between January and July 2012.

Fed Debt Buying

“The most notable part of the Fed announcement is that they are emphasizing the purchases first as evidenced by the long-bond purchases followed by 10-year debt purchases,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut.

The extra yield investors demand to hold 30-year U.S. bonds instead of two-year notes fell today to 267 basis points. It shrank to 260 basis points on Sept. 22, the least on a closing basis since February 2009.

Personal spending in the U.S. advanced 0.2 percent in August after a revised 0.7 percent increase in the previous month, the Commerce Department reported.

“As the macro situation deteriorates in the final quarter, the weaker growth will reinforce the financial market tensions and underpin the bid for safety,” said Christoph Rieger, head of fixed-income strategy at Commerzbank AG in Frankfurt.

Break-Even Rate

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt known as the break-even rate, fell for a third day to 1.78 percentage points. The average over the past 12 months is 2.26 percentage points.

Treasuries also gained today as some investors purchased debt to increase the duration of their portfolios to match benchmarks at the end of the month, such as the Barclays Plc U.S. Treasury Index. Duration measures how sensitive a bond’s price is to changes in yield.

The Barclays index is expected to extend by 0.08 years for the end of this month, compared with 0.13 years at the end of August, according to the firm, a primary dealer.

Treasuries with a maturity of 10 years or longer have returned 22 percent this quarter, the most since 1980, according to Bank of America Merrill Lynch indexes. The S&P 500 Index has fallen 14 percent since June 30, the most since 2008.

European Rescue

Europe’s leaders are turning their focus to the next steps to stem the region’s debt crisis after German lawmakers approved yesterday an expansion of the euro-area rescue fund that raises Germany’s guarantees to 211 billion euros ($285 billion) from 123 billion euros. The nation won’t increase its contribution further, the Finance Ministry said today.

Ten-year note yields will increase to 2.20 percent by year- end, according to the average forecast in a Bloomberg News survey of banks and securities firms, with the most recent forecasts given the heaviest weightings. On Aug. 12, yields were projected to finish 2011 at 2.72 percent.

--With assistance from Emma Charlton in London. 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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