Bloomberg News

Treasuries Hold Gain as Bernanke May Emphasize Slowdown

July 16, 2012

Treasury yields extended last week’s decline after Germany’s top court said it will take more than eight weeks to rule on the euro-area’s bailout fund, holding up crisis resolution efforts and boosting demand for safer assets.

Benchmark 10-year yields were about four basis points from a record low amid speculation Federal Reserve Chairman Ben S. Bernanke will highlight the need for low borrowing costs to spur the economy when he speaks tomorrow. U.S. retail sales rose for the first time in three month in June, economists forecast before a report today.

“Investors are focused on holding high-quality bonds, like Treasuries, as policy makers focus on accommodative policy and because of the problems in Europe,” said Piet Lammens, head of research at KBC Bank NV in Brussels. “What Bernanke says this week will be closely watched. We need to see a stronger indication that more stimulus is coming before the Treasury yields can make new lows.”

The benchmark U.S. 10-year yield fell one basis point, or 0.01 percentage point, to 1.48 percent at 6:45 a.m. in New York, according to Bloomberg Bond Trader prices. The 1.75 percent note due in May 2022 rose 2/32, or 63 cents per $1,000 face amount, to 102 14/32.

The yield dropped six basis points last week and reached an all-time low of 1.4387 percent on June 1.

German Ruling

The Federal Constitutional Court in Karlsruhe will issue a ruling on bids to halt Germany’s participation in the European Stability Mechanism and the fiscal treaty on Sept. 12, it said today in an e-mailed statement. That’s more than two months after it held a hearing on the measures on July 10.

The delay may compound efforts to resolve the 2 1/2-year- old crisis as European leaders disagree over the details of bailout conditions, bank rescues and burden-sharing.

Bernanke is scheduled to testify before the Senate Banking Committee tomorrow, discussing the outlook for the economy and monetary policy. He will speak before the House Financial Services Committee the following day.

“There’s a flight to quality,” said Kevin Yang, head of bond investment in Taipei at Hontai Life Insurance Co., which has $6 billion in assets. “The Fed will maintain a low- interest-rate environment.”

‘Price Strength’

Treasury 10-year futures expiring in September advanced 0.1 percent to 134 22/32.

Futures are “bullish” while they trade above a support level at 134, Richard Adcock, head of fixed-income technical strategy in London, wrote in an e-mailed note. This indicates “further price strength,” he said.

A break above the record high of 134 31/32 reached on June 1 “will be the next bullish development,” he wrote, saying the next target level would be 135 28/32.

The Fed under Bernanke bought $2.3 trillion of Treasury and mortgage-related debt to stimulate the economy. The central bank decided in June to extend a policy known as Operation Twist, where it sells short-term securities and uses the proceeds to buy longer-term debt, to $667 billion from $400 billion.

The Fed is scheduled to buy as much as $2 billion of Treasuries maturing from August 2022 to February 2031 today as part of the plan, according to the Fed Bank of New York’s website. Bernanke has also pledged to keep the central bank’s target for overnight bank lending at almost zero through at least late 2014.

U.S. retail sales rose 0.2 percent last month, after dropping 0.2 percent in May, according to a Bloomberg News survey of economists before the Commerce Department report.

Too Expensive

The decline in yield made Treasuries too expensive for Roger Bridges at Tyndall Investment Management Ltd.

“I wouldn’t buy them,” said Bridges, who oversees the equivalent of $15.3 billion of debt as the Sydney-based head of fixed income at Tyndall, a unit of Nikko Asset Management Co.

The term premium, a model created by the Fed that includes expectations for interest rates, growth and inflation, showed Treasuries were the most expensive ever last week. The gauge fell to a negative 0.9617 percent, a record low.

Vanguard Group Inc., whose $148.2 billion of Treasuries makes it the largest private owner of U.S. debt, says the nation has until 2016 to contain its borrowings before bond investors revolt and drive up interest rates.

“In the absence of a long-term credible plan, we are somewhere around four years away on where the markets are going to say ‘enough is enough,’” said Robert Auwaerter, head of the Valley Forge, Pennsylvania-based Vanguard’s fixed-income group since 2003 and who this year was inducted into the Fixed Income Analysts Society Inc.’s Hall of Fame.

The U.S. has avoided the turbulence rocking Europe, where five nations have sought bailouts as their borrowing costs soared because investors boycotted their bonds. Instead, they have sought U.S. assets as a haven because of the dollar’s status as the world’s primary reserve currency, pushing note yields to record lows even though the amount of public debt outstanding has grown to $15.9 trillion from less than $9 trillion in 2007.

To contact the reporters on this story: Emma Charlton in London at echarlton1@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net.

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


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