Bloomberg News

Treasury Five-Year Yield Reaches Record Low on Fed QE Optimism

January 26, 2012

Jan. 26 (Bloomberg) -- Treasuries rose, with the five-year note yield touching a record low for a second day, as the Federal Reserve said it’s considering increasing its bond purchases.

U.S. government-debt rose as orders for U.S. durable goods rose more than forecast in December and claims for jobless benefits increased last week. Five-year yields touched 0.7538 percent after Fed officials yesterday unexpectedly said their benchmark interest rate will stay low until at least late 2014. The U.S. will sell $29 billion of seven-year securities today.

“The numbers certainly were good -- there’s strength in the underlying data,” said Thomas Simons, a government-debt economist in New York at Jefferies Group Inc., one of 21 primary dealers that trade Treasuries with the Fed. “The data has less importance in the market because the Fed has made an effort to say that, even if things improve, they still expect to remain accommodative for a considerable period of time.”

The 10-year rate slid six basis points, or 0.06 percentage point, to 1.94 percent at 12:29 p.m. New York 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 1/2, or $5 per $1,000 face amount, to 100 18/32.

Benchmark five-year yields fell five basis points to 0.76 percent after falling 10 basis points yesterday following a Treasury auction of $35 billion of the securities, according to data compiled by Bloomberg. Investors who snapped up the five- year notes saw the assets soar as much as $238 million after the Fed interest-rate pledge.

Pre-Auction Trading

The seven-year notes being sold today yielded 1.36 percent today in pre-auction trading, versus 1.43 percent at the previous sale of the securities on Dec. 21. The record low yield was 1.415 percent in November. Today’s note auction is the third and final of the week, including a $35 billion two-year sale on Jan. 24.

The U.S. Senate voted today to permit a $1.2 trillion increase increase in the nation’s debt limit designed to be large enough to accommodate borrowing through the November election.

Demand for aircraft, autos and business equipment led durable goods higher, with bookings for goods meant to last at least three years climbing 3 percent after a revised 4.3 percent gain the prior month that was more than previously estimated, data from the Commerce Department showed today. Economists projected a 2 percent increase, according to the median forecast in a Bloomberg News survey.

Applications for unemployment insurance payments climbed by 21,000 to 377,000 in the week ended Jan. 21, up from an almost four-year low in the prior period, Labor Department figures showed today in Washington. The median forecast of 47 economists in a Bloomberg News survey projected 370,000.

Home Sales

Sales of new U.S. homes unexpectedly declined in December for the first time in four months, capping the slowest year on record for builders. Purchases of single-family properties decreased 2.2 percent to a 307,000 annual pace, figures from the Commerce Department showed today in Washington. The median forecast in a Bloomberg News survey of economists called for a rate of 321,000 home sales. Last year marked the worst year for the industry in records going back to 1963.

Treasury market volume rose yesterday to the highest since Nov. 1 after policy makers said the Fed will remain accommodative. About $381 billion of Treasuries changed hands through ICAP Plc, the world’s largest interdealer broker, above the one-year average of $282 billion.

‘On the Table’

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.

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.

“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.”

Yields on Fannie Mae’s current coupon 30-year fixed-rate mortgage bond declined to 2.7 percent today, the lowest ever, as investors bet the Fed will continue easing. The yield declined to 78 basis points more than 10-year U.S. government debt, near the tightest so-called spread since February.

‘Embark on QE3’

“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 Fed bought $2.522 billion of Treasuries due from February 2036 to November 2041 today as part of its program to replace $400 billion of short-term debt in its portfolio with longer-term Treasuries in an effort to reduce borrowing costs further and counter rising risks of a recession.

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 1.17 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 in Hong Kong for Asia and the Pacific at Bank of America Merrill Lynch, a primary dealer. “It increases the inflation risk, so 10-years will not rally that much.”

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.

--With assistance from Keith Jenkins and Lucy Meakin in London, Kristine Aquino in Singapore and Kenneth Pringle in New York. Editors: Kenneth Pringle, Greg Storey

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

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

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