Bloomberg News

Treasuries Rally Most Since 2008 on European Crisis, Fed’s Twist

October 01, 2011

Oct. 1 (Bloomberg) -- Treasuries advanced in the third quarter the most since the depths of the financial crisis in 2008 as Europe’s sovereign-debt crisis and a sluggish U.S. economy spurred demand for the world’s safest assets.

Yields on 30-year bonds dropped below 3 percent this week as investors poured into the securities before the Federal Reserve begins purchasing longer-term debt and selling shorter maturities under Operation Twist in two days. U.S. debt securities rose in September before next week’s payrolls report, forecast to show the unemployment rate stayed at 9.1 percent.

“There’s increasing risk aversion,” said Christopher Sullivan, who oversees $1.7 billion as chief investment officer at the United Nations Federal Credit Union in New York. “It’s mainly influenced by perceptions of the European sovereign-debt crisis. The underlying data in the U.S. have been largely weak, and that’s also encouraged flows into Treasury securities, as has the Fed’s Operation Twist.”

Yields on 30-year bonds decreased 70 basis points, or 0.70 percentage point in September to 2.91 percent yesterday in New York, according to Bloomberg Bond Trader prices.

Thirty-year yields tumbled 146 basis points in the third quarter in the biggest drop since the period ended December 2008. Benchmark 10-year yields slid 125 basis points, the biggest decrease in almost three years. The yields touched 1.6714 percent on Sept. 23, the lowest in Fed figures beginning in 1953. Two-year yields fell 22 basis points.

Bond Returns

Treasuries returned 6 percent in the third quarter through Sept. 29, the most on a quarterly basis since the fourth quarter of 2008. Treasuries with maturities of 10 years or longer returned 22 percent in the third quarter, the most since 1980, according to Bank of America Merrill Lynch indexes. Stocks tumbled, with the Standard & Poor’s 500 Index falling 13 percent in the biggest quarterly drop since the last three months of 2008.

“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.”

This week’s $35 billion auction of five-year notes and the $29 billion of seven-year securities drew record low yields. The $35 billion auction of two-year notes produced the highest demand in a year.

Fed’s Debt Buying

Yields on 30-year bonds tumbled 41 basis points during the week including Sept. 21, when the central bank 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 yesterday it will buy $44 billion of longer-maturity Treasuries and sell the same amount of shorter- term debt this month. 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 from the New York Fed.

“Bonds could go potentially 40 basis points lower,” said Ira Jersey, an interest-rate strategist in New York at Credit Suisse Group AG, one of 20 primary dealers that trade directly with the Fed.

The extra yield investors demand to hold 30-year U.S. bonds instead of two-year notes fell yesterday to 265 basis points. The spread shrank to 260 basis points on Sept. 22, the least on a closing basis since February 2009.

Bullard’s View

St. Louis Fed President James Bullard said yesterday in San Diego that the central bank is prepared to ease policy should the U.S. economy weaken, while keeping an eye on inflation risks. Fed Chairman Ben S. Bernanke is scheduled to testify before the Joint Economic Committee of Congress on Oct. 4.

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 to 1.76 percentage points. The average over the past 12 months is 2.26 percentage points.

The U.S. added 50,000 positions in September after zero job growth in the previous month, according to the median forecast of 67 economists in a Bloomberg News survey before the Labor Department’s report Oct. 7.

Ten-year 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.

Europe’s leaders are turning their focus to the next steps to stem the region’s debt crisis after German lawmakers approved 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 yesterday.

“Europe is a wild card,” said Charles Comiskey, head of Treasury trading at Bank of Nova Scotia in New York. “It’s still something everyone is going to be looking at.”

--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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