Bloomberg News

Treasuries Fall as Fed Minutes Damp Sentiment for More Stimulus

April 03, 2012

Treasuries fell, pushing 10-year yields to the highest level in more than a week, after minutes from the Federal Reserve’s last meeting showed policy makers are holding off on increasing monetary accommodation unless the U.S. economic expansion falters.

Thirty-year bond yields rose the most in more than two weeks as the minutes from the March 13 meeting dashed speculation policy makers would hint at more asset purchases, known as quantitative easing. Federal Reserve Bank of San Francisco President John Williams said the central bank must continue to act “vigorously” to boost the economy.

“The market was looking for QE3,” said William Larkin, a fixed-income money manager who helps oversee $500 million at Cabot Money Management Inc. in Salem, Massachusetts. “They are saying that the recovery is on track. They are moving to more neutral, from more dovish.”

The benchmark 10-year note’s yield rose 12 basis points, or 0.12 percentage point, to 2.3 percent at 4:59 p.m. New York time, according to Bloomberg Bond Trader prices. The 2 percent note due in February 2022 fell one point, or $10.00 per $1,000 face value, to 97 3/8. The yield touched the highest level since March 22. It declined earlier as much as three basis points. It touched a record low 1.67 percent on Sept. 23.

The yield on the 30-year bond rose 12 basis points to 3.44 percent, the most since March 14.

“The anti-QE3 language that’s in here is definitely pushing the market to higher yields,” said Thomas Simons, a government-debt economist in New York at Jefferies Group Inc., one of 21 primary dealers that trades with the Fed.

‘Too Excited’

The odds are that the Fed will need a third round of bond purchases, or quantitative easing, to bolster the economy, according to 15 of 21 primary dealers surveyed last week.

“The market had been getting too excited that QE was coming no matter what,” said Priya Misra, head of U.S. rates strategy at Bank of America Merrill Lynch in New York. “Now it’s all about the economy. If we get a 200,000 plus on payrolls, there is no way the Fed will do QE now. They need to see a slowing in the momentum.”

Treasury yields have remained close to historic lows on a flight to quality from Europe and as the U.S. central bank has become the largest purchaser of the securities.

Williams’ View

“We are far below maximum employment and are likely to remain there for some time,” Williams said in the text of remarks given today in San Diego. “Under these circumstances, it’s essential that we keep strong monetary stimulus in place. The recovery has been sluggish.”

Fed Bank of Atlanta President Dennis Lockhart said with the positive outlook for the U.S. economy, he sees no need for quantitative easing at this time. Lockhart spoke in an interview on Bloomberg Radio’s “Hays Advantage” with Kathleen Hays.

“The economy is in a situation where it can be interpreted as half full or half empty,” Lockhart said. “I’m not concerned about a double-dip reaction. We have an economy that’s growing at a moderate pace and is getting more traction.”

Fed Chairman Ben S. Bernanke said last week the central bank will consider further stimulus. The bank on March 13 left unchanged its statement that economic conditions would probably warrant “exceptionally low” interest rates at least through late 2014. It has held its target rate to a range of zero to 0.25 percent since December 2008. The yield on the 10-year Treasury note touched a 2012 high of 2.4 percent on March 20.

‘Student of History’

“The Chairman, a great student of history, believes one of the great monetary mistakes this Fed could make is to remove accommodation too early,” said Jeffrey Schoenfeld, a partner and chief investment officer in New York at Brown Brothers Harriman & Co., which manages $33 billion in assets. “The Fed is likely to keep monetary policy easy for an extended period. Still, with actual rates improving and expectations of growth improving, it’s hard to hold rates at historical low level.”

Treasuries rose earlier after a government report showed U.S. factory orders rose 1.3 percent in February, after a revised 1.1 percent decline in January, compared to median estimate of a 1.5 percent increase by economists in a Bloomberg News survey before the report today.

A report April 6 is forecast to show the U.S. added 201,000 jobs in March.

‘About the Economy’

Treasuries fell 1.3 percent in the first quarter, the biggest decline since the last three months of 2010, according to Bank of America Merrill Lynch indexes.

The MSCI All-Country World Index of stocks returned 12 percent in the period including reinvested dividends, data compiled by Bloomberg show.

The central bank bought $2.3 trillion of securities in two rounds of quantitative easing from December 2008 to June 2011 to spur the economy. The Fed today purchased $1.347 billion in inflation-indexed securities as part of a program ending in June that replaces $400 billion of shorter-term debt with longer maturities to hold down borrowing costs.

Valuation measures show government debt has cheapened. The term premium, a model created by economists at the Fed, reached negative 0.37 percent today, the least expensive since March 22. It reached negative 0.26 percent on March 19, the least expensive since October. It closed yesterday at negative 0.47 percent. A negative reading indicates investors are willing to accept yields below what’s considered fair value.

Gross on Portugal

Yields dropped earlier as falling prices of bonds of Portugal and Spain renewed concern the region’s sovereign debt crisis will worsen.

Bill Gross, who runs the world’s biggest bond fund, said Portugal was headed for a debt “haircut” after yields on the nation’s 10-year note today touched the highest level in a week. Gross, co-chief investment officer and founder of Newport Beach, California-based Pacific Investment Management Co., said in a Twitter post about Portugal that “a ‘voluntary exchange’ by private market seems inevitable.”

Portugal’s 10-year yield touched 12.2 percent, the highest level since March 26.

The yield on Spain’s 10-year bonds rose 10 basis points to 5.45 percent today and has gained more than 50 basis points since March 2. Spain’s public debt will rise to a record this year as it sells almost 37 billion euros ($49 billion) of bonds to finance a budget deficit that was more than twice the euro- region limit last year.

To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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