Bloomberg News

Treasury 30-Year Bonds Fall as Fed Stimulus Speculation Rises

July 19, 2012

Treasury 30-year bonds fell as speculation increased that the Federal Reserve will provide more monetary stimulus after manufacturing and unemployment-claims reports added evidence the economy is slowing.

The U.S. sold 10-year inflation-indexed securities at a record negative yield for a fourth consecutive auction of the securities as investors sought a hedge against the risk of rising consumer prices. Fed Chairman Ben S. Bernanke said yesterday during a second day of testimony in Washington that central bankers are ready to act if needed.

“The market is projecting at some point in the near future that the Fed does act,” said Justin Lederer, an interest-rate strategist in New York at Cantor Fitzgerald LP, one of 21 primary dealers that trade with the central bank. “I don’t think it happens in the next meeting, but the signs are pointing to further stimulus.”

The yield on the 30-year bond rose two basis points, or 0.02 percentage points, to 2.61 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. The 3 percent note due in May 2042 fell 11/32, or $3.44 per $1,000 face value, to 107 31/32. Benchmark 10-year yields rose one basis point to 1.51 percent.

The Treasury sold $15 billion in 10-year Treasury Inflation Protected Securities at a so-called high yield of negative 0.637 percent, the fourth auction of the securities where investors were willing to pay the U.S. to hold their principal. Five-year TIPS have also been sold at negative yields at the past five auctions of the securities.

Leading Indicators

Treasury trading volume reported by ICAP Plc, the largest inter-dealer broker of U.S. government debt, rose to $246 billion, the highest since July 11. Trading averaged $242 billion this year.

Purchases of existing homes decreased 5.4 percent to a 4.37 million annual rate last month from a revised 4.62 million in May, figures from the National Association of Realtors showed today in Washington. The median forecast of economists surveyed by Bloomberg News called for a 4.62 million pace.

The Conferences Board’s gauge of the outlook for the next three to six months decreased 0.3 percent after a revised 0.4 percent increase in May, the New York-based group said today. Economists projected the gauge would drop by 0.1 percent, according to the median estimate in a Bloomberg News survey.

“Leading indicators rolled over -- this isn’t a particularly optimistic period,” said Dan Greenhaus, chief global strategist at the broker-dealer BTIG LLC in New York. “There’s a bit of a higher probability that the U.S. is in a recession right now. It’s a slightly higher probability than some believe.”

‘Quantitative Easing’

Applications for jobless benefits increased by 34,000 to 386,000 in the week ended July 14, Labor Department figures showed. Economists forecast 365,000 claims, according to the median estimate in a Bloomberg News survey. The volatility in the numbers was due to a change in the timing of annual automobile plant layoffs, a Labor Department spokesman said as the data were released.

“The Fed is going to put on some type of quantitative easing as we go forward,” 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. Bernanke “did not address the timing and the details, so we have some softness because of that.”

The Fed has purchased $2.3 billion of mortgage and Treasury debt in two separate rounds of asset purchases intended to stimulate the economy, known as quantitative easing. While policy makers refrained from introducing a third round of purchases last month, Bernanke indicated this week in two days of Washington testimony that it remains an option.

Inflation, Deflation

The central bank purchased $1.8 billion of bonds due from February 2036 to May 2042 today as part of another program known as Operation Twist. The Fed is swapping short-term Treasuries in its holdings for longer maturities to put downward pressure on long-term borrowing costs.

“The fear of the Fed is not of inflation, it’s of deflation,” said Charles Comiskey, head of Treasury trading at primary dealer Bank of Nova Scotia (BNS) in New York. “There’s a better chance of falling into deflation.”

TIPS have handed investors a 5.8 percent return this year, compared with a 2.7 percent gain for conventional Treasuries, according to indexes compiled by Bank of America Merrill Lynch.

U.S. inflation-protected notes pay interest on a principal amount that increases at the same rate as the Labor Department’s consumer price index.

Consumer Prices

The five-year, five-year forward break-even rate, a measure of inflation expectations that the Fed uses to help guide monetary policy, was 2.4. The figure compares with 2012’s high of 2.78 percentage points and the average of 2.75 percent for the past decade.

U.S. consumer prices rose 1.7 percent in June from the year before, the Labor Department reported on July 17. A Bloomberg survey of economists projected 1.6 percent, which would have been the lowest level in 17 months.

The U.S. will sell $35 billion of two-year notes, the same amount of five-year securities and $29 billion of seven-year debt over three days starting July 24, the Treasury announced today.

To contact the reporter on this story: Susanne Walker in New York at

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

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