Bloomberg News

Treasuries’ Yield Difference Widens on Bernanke Stance, Economic Strength

March 03, 2012

Ben S. Bernanke, chairman of the U.S. Federal Reserve, delivers his semi-annual monetary policy report to the Senate Banking Committee in Washington, D.C. on March 1, 2012. Photographer: Joshua Roberts/Bloomberg

Ben S. Bernanke, chairman of the U.S. Federal Reserve, delivers his semi-annual monetary policy report to the Senate Banking Committee in Washington, D.C. on March 1, 2012. Photographer: Joshua Roberts/Bloomberg

The difference between yields on two- and 10-year notes increased for the first time in three weeks amid better-than-forecast economic data and Federal Reserve Chairman Ben S. Bernanke’s failure to indicate the central bank will boost stimulus.

U.S. 10-year note yields rose Feb. 29 and March 1 as Bernanke’s two days of congressional testimony damped speculation the central bank would engage in a third round of buying Treasuries, known as quantitative easing. Two-year note yields fell for the first time in five weeks on concern that measures to increase lending in the euro region won’t boost economic growth, spurring safety demand. A government report next week is forecast to show February jobs gains exceeded 200,000 for a third straight month.

“The economic data has continued to come in better than expected and there was no announcement on QE3,” said Larry Milstein, managing director in New York of government- and agency-debt trading at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors.

The yield on the 10-year note was little changed for the week at 1.97 percent in New York, according to Bloomberg Bond Trader prices. The 2 percent security maturing in February 2022 traded at 100 7/32.

Yield Trends

The two-year note yield fell three basis points to 0.27 percent, the first weekly decline since the five days ended Jan. 27.

The so-called yield curve measuring the differences between two- and 10-year yields reached 1.74 percentage points this week, compared with 1.67 percentage points on Feb. 24 and an average for the past year of 2.14 percentage points.

Hedge-fund managers and other large speculators decreased their net-short position in 10-year note futures in the week ending Feb. 28, according to U.S. Commodity Futures Trading Commission data. Speculative short positions, or bets prices will fall, outnumbered long positions by 22,496 contracts on the Chicago Board of Trade. Net-short positions fell by 42,789 contracts, or 66 percent, from a week earlier, the Washington- based commission said in its Commitments of Traders report.

“I’m in the risk-off camp,” said David Ader, head of government bond strategy at Stamford, Connecticut-based CRT Capital Group LLC, in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “I don’t think this is an atmosphere where there’s going to be a lot of risk appetite.”

Trading Range

Ten-year note yields have traded between 1.79 percent and 2.09 percent this year. Treasuries of all maturities have lost 0.5 percent this year, compared with a gain of 9.8 percent last year, according to Bank of America Merrill Lynch data.

Bank of America Merrill Lynch’s MOVE index, which measures price swings based on options, closed the week at 76 basis points, close to the lowest since July 2007 and compared with the five-year average of 112 basis points.

Investors should embrace a defensive strategy because of the limits of zero-bound interest rates and systemic debt risk in global financial markets, Pacific Investment Management Co.’s Bill Grosswrote.

“An instant replay of these past few decades would have shown that accelerating asset prices weren’t due to any particular wisdom on the part of academia or the investment community, but an offensively minded Federal Reserve and their global counterparts who were printing money, lowering yields and bringing forward a false sense of monetary wealth that was dependent on perpetual motion,” Gross wrote in a commentary posted on Newport Beach, California-based Pimco’s website.

Pimco Holdings

Gross boosted the proportion of U.S. government and Treasury debt in Pimco’s $250.5 billion Total Return Fund in January to 38 percent and raised his portion of mortgage securities to 50 percent, the highest since June 2009.

Bernanke told two congressional panels that inflation is likely to “remain subdued” as the Fed continues to monitor energy markets. He said the inflationary impact of higher gasoline prices is likely to be temporary. Gasoline prices have climbed 13 percent since the start of the year to $3.72 a gallon, according to the American Automobile Association.

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of expectations for consumer prices during the life of the debt, was 2.24 percentage points. The decade-long average is 2.14 percentage points.

Inflation Target

Fed policy makers have a target of 2 percent for cost increases in the economy, based on the personal consumption expenditures index.

The European Central Bank said overnight deposits soared to a record after its second allocation of three-year loans on Feb. 29. Financial institutions parked 776.9 billion euros ($1.03 trillion) with the Frankfurt-based ECB, up from 475.2 billion euros a day earlier. The ECB this week lent banks 529.5 billion euros for three years in the biggest-single refinancing operation in its history.

The Conference Board’s index of consumer sentiment increased more than forecast, to 70.8 from a revised 61.5 in January, figures from the New York-based private research group showed Feb. 28. Economists predicted the gauge would climb to 63, according to the median estimate in a separate survey.

The U.S. economy expanded at a “modest to moderate pace” in January and early February, fueled by manufacturers, including automakers, the Fed said Feb. 29 in its Beige Book business survey, published two weeks before the Fed meets to set monetary policy.

A government report on March 9 is forecast to show nonfarm payrolls grew by 210,000 in February, after gaining 243,000 the previous month, according to a Bloomberg News survey. The unemployment rate is forecast to hold at 8.3 percent.

“The jobs market is improving slightly,” Charles Comiskey, head of Treasury trading at Bank of Nova Scotia in New York, said March 1. “Yields backed up a little bit.”

The 10-year Treasury yield will climb to 2.52 percent by year-end, according to a Bloomberg survey of banks and securities companies with the most recent forecasts given the heaviest weightings.

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

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

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