Treasuries rose as Federal Reserve Chairman Ben S. Bernanke reiterated during his second day of testimony to Congress that the U.S. fiscal situation is “unsustainable,” supporting demand for the safest assets.
Yields on benchmark 10-year notes traded within five basis points of an all-time low as Bernanke said economic activity “decelerated” during the first half of the year, adding that the central bank is “prepared to take further action as appropriate.” The economy expanded at a “modest to moderate” pace with “tepid” job growth in June and early July, the Fed said in its Beige Book business survey. The Treasury will sell $15 billion of 10-year inflation-indexed debt tomorrow.
“He seems to be a little more negative on the economy than most people thought, so that’s why you have a very good bid for Treasuries,” said Ray Remy, head of fixed-income in New York at Daiwa Capital Markets America Inc., one of 21 primary dealers that trade directly with the Fed. “It’s been somewhat market friendly.”
The benchmark 10-year yield declined one basis point, or 0.01 percentage point, to 1.49 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. The 1.75 percent note due in May 2022 rose 1/8, or $1.25 per $1,000 face amount, to 102 10/32. The yield reached a record low of 1.4387 percent on June 1.
The 30-year yield fell one basis point to 2.6 percent, after dropping to a record 2.51 percent also on June 1.
Germany’s five-year note yield fell as much as four basis points today to a record 0.254 percent while the rate on similar-maturity U.K. debt touched an all-time low of 0.472 percent.
A year-end “fiscal cliff” would damage the recovery, Bernanke said in response to questions before the House Financial Services Committee in Washington, referring to tax cuts on wages, capital gains, dividends and estates that are scheduled to lapse.
Economic expansion was limited over the past two months as retail sales and manufacturing cooled in some regions, the Fed said in the Beige Book, which is based on reports from its 12 district banks. The report, which gives central bankers anecdotal evidence on the economy before they open a two-day policy meeting in Washington on July 31, supports Bernanke’s view that the U.S. lost momentum in the first half of 2012.
The Fed purchased $4.714 billion of Treasuries maturing from August 2020 to May 2022 today as part of its program to jump-start the economy.
“You get the sense people are increasingly concerned,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee. “People looking to put money to work in the market can’t wait for big selloffs anymore. Those who have to put cash to work will move quicker on smaller selloffs.”
Treasury trading volume reported by ICAP Plc, the largest inter-dealer broker of U.S. government debt, dropped to $171 billion after climbing yesterday to $213 billion, the most since July 11. Trading averaged $242 billion this year.
Volatility dropped to 61.9 basis points, the lowest since May 11, according to Bank of America Merrill Lynch’s MOVE index. It dropped to a five-year low of 56.7 basis points on May 7, and has averaged 76 basis points this year, touching a 2012 high of 95.4 basis points on June 15. It reached a record high of 264.6 basis points in October 2008 as the financial crisis intensified. The index measures price swings based on options.
“The Treasury market is in the process of digesting what additional Fed action may mean for the market,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “We are pricing to the notion that there are still significant economic headwinds both domestically and abroad.”
Treasury Secretary Tim Geithner said he sees a “significant drag” on the recovery. Risks from Europe’s debt crisis are “more severe,” and are beyond U.S. control, he said today at the CNBC Institutional Investor Delivering Alpha Conference in New York.
Economists estimate data will show applications for jobless benefits increased last week to 364,000 in the week ended July 14 from 350,000 a week earlier.
“Ten-year yields in the U.S. can go lower still,” Michael Pond, co-head of interest-rate strategy in New York at primary dealer Barclays Plc, said in an interview on Bloomberg Television’s “Surveillance” with Tom Keene and Sara Eisen. “We have been at 1.50 percent for a while, despite the fact that the news out of Europe is worse, the economic date is worse. We think rates have another leg lower to go.”
Barclays forecasts the yield on the 10-year note will drop to 1.25 percent this year.
The Treasury’s 10-year TIPS sale follows a $13 billion auction of the securities on May 17 that set a record low yield of negative 0.391 percent. The previous record yield was negative 0.089 percent on March 22. The May sale of the securities was the third consecutive auction where investors paid the government to hold their money.
The bid-to-cover ratio for the notes, which gauges demand by comparing the amount bid with the amount offered, was 3.01, the strongest since April 2010, and higher than the average of 2.73 at the past 10 auctions of the securities.
The difference between yields on 10-year notes and similar- maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt, was 2.08 percentage points. The average over the past decade is 2.15 percentage points.
Ten-year yields will increase to 1.93 percent by year-end, according to a Bloomberg survey of economists with the most recent projections given the heaviest weightings.
Treasuries returned 2.8 percent in the three months ended yesterday, according to Bank of America Merrill Lynch Indexes. The MSCI All-Country World Index (MXWD) of stocks handed investors a 4 percent loss including reinvested dividends, data compiled by Bloomberg show.
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