Bloomberg News

Treasuries Extend Biggest Gain in 2 Weeks as Gross Sees More QE

January 26, 2012

Jan. 26 (Bloomberg) -- Treasuries rose, extending yesterday’s rally that pushed 10-year note yields down the most in two weeks, as Bill Gross and other investors said the Federal Reserve is preparing to increase its bond purchases.

A third, fourth and fifth round of easing “lie ahead,” Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., wrote in a Twitter post. Fed Chairman Ben S. Bernanke said yesterday the central bank is considering additional bond purchases to boost growth after extending its pledge to keep interest rates low through at least late 2014. The Fed has already purchased $2.3 trillion of debt in two rounds of quantitative easing known as QE1 and QE2.

“The statements out of the Fed were more dovish than investors were expecting,” said Kornelius Purps, a fixed-income strategist at UniCredit SpA in Munich. “This, together with a relatively downbeat assessment of the economic outlook, now leads to a reassessment in the bond market with a well-supported U.S. bond market.”

The 10-year rate slid four basis points, or 0.04 percentage point, to 1.96 percent at 10:39 a.m. London time, according to Bloomberg Bond Trader prices. It fell seven basis points yesterday, the most since Jan. 11. The 2 percent securities maturing in November 2021 climbed 10/32, or $3.13 per $1,000 face amount, to 100 11/32.

The yield on January 2017 notes fell three basis points to 0.79 percent. Benchmark five-year rates dropped to record low 0.76 percent yesterday.

‘Financial Repression’

U.S. policy makers are “prepared to provide further monetary accommodation” and bond buying is “an option that’s certainly on the table,” Bernanke said after officials completed a two-day meeting yesterday.

“They feel they have to do more, to embark on QE3, which I have no doubt will come,” said Hans Goetti, the Singapore-based chief investment officer for Asia at Finaport Investment Intelligence, which oversees the equivalent of $1.52 billion.

The U.S. will suffer “financial repression” as the Fed implements additional quantitative easing, Gross wrote in the Twitter post yesterday. He addressed the idea of “financial repression” in his monthly investment outlook on Jan. 4, writing that it “depends on negative real yields.”

Ten-year notes offer a so-called real yield of minus 0.99 percent after accounting for annualized consumer-price gains of 3 percent.

Five-Year ‘Benefit’

The Fed is replacing $400 billion of shorter-maturity Treasuries in its holdings with longer-term debt to “put downward pressure on longer-term interest rates,” according to the central bank’s statement announcing the strategy in September.

It plans to buy as much as $2.75 billion of securities due from February 2036 to November 2041 today as part of the program, according to the Fed Bank of New York website.

The difference between five- and 10-year yields widened to as much as 1.21 percentage points today, the most since Oct. 28, before settling at 1.18 percentage points.

Shorter-term Treasuries tend to track what the central bank does with its target for overnight lending, while longer maturities are more influenced by the inflation outlook.

“By keeping rates low for a longer period, beyond two years, the five-year will benefit most,” said Bin Gao, head of rate research for Asia and the Pacific at Bank of America Merrill Lynch in Hong Kong. “It increases the inflation risk, so 10-years will not rally that much.” The company is one of the 21 primary dealers that trade with the Fed.

Fidelity’s Strategy

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, was 2.13 percentage points, in line with the 10-year average.

Policy makers yesterday set a long-term goal of 2 percent inflation, and forecast that price increases would fall short of that target this year and next.

Fidelity Investments, the Boston-based fund company that oversees $1.52 trillion, is favoring inflation-linked bonds.

“I have preferred Treasury Inflation Protected Securities to regular Treasuries recently,” Bill Irving, the manager of the $5.48 billion Fidelity Government Income Fund, wrote in a report on the company’s website yesterday. “Given how accommodative the Fed has been, and given the possibility that the economy’s strength could surprise to the upside, I think the inflation protection TIPS can offer is worth considering.”

The fund returned 7.5 percent in the past year, beating 55 percent of its competitors, according to data compiled by Bloomberg. TIPS have handed investors a 15 percent gain over 12 months, versus 9.1 percent for conventional Treasuries, according to Bank of America Merrill Lynch data.

The Treasury Department will sell $29 billion of seven-year securities today, following a $35 billion five-year auction yesterday and a $35 billion two-year sale on Jan. 24.

Seven-year notes yielded 1.38 percent in pre-auction trading, versus 1.43 percent at the previous sale of the securities on Dec. 21. The record low auction yield was 1.415 percent in November.

--With assistance from Kristine Aquino in Singapore and Lucy Meakin in London. Editors: Matthew Brown, Paul Dobson

To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net; Keith Jenkins in London at kjenkins3@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net


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