Treasuries had a monthly gain as Europe’s debt crisis underpinned demand for the securities and investors awaited the results of central-bank policy meetings in the U.S. and euro area this week.
Benchmark 10-year note yields dropped as the Federal Reserve started a two-day meeting in Washington. While the Federal Open Market Committee probably won’t undertake more asset purchases, it may keep a pledge to hold the main interest rate near zero through late 2014, economists predict. Treasuries rallied with German bunds in July as economic reports added to signs Europe’s fiscal woes are harming the economy.
“The market is trying to position itself for tomorrow’s announcement,” said Charles Comiskey, head of Treasury trading at Bank of Nova Scotia (BNS) in New York, one of 21 firms that trade Treasuries with the central bank. “The market is so fickle about what’s going on. It’s chopping around.”
The U.S. 10-year yield declined three basis points, or 0.03 percentage point, to 1.47 percent at 4:59 p.m. in New York, according to Bloomberg Bond Trader prices. The 1.75 percent security due in May 2022 rose 10/32, or $3.13 per $1,000 face amount, to 102 18/32. The yield fell to a record 1.379 percent on July 25.
The benchmark debt advanced in three of the past four months.
“With continued growth concerns, the European debt crisis hanging over our heads and political uncertainty domestically, yields are going to have a hard time rising meaningfully,” 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.
U.S. government securities, perceived to be among the world’s safest and most liquid assets, returned 1 percent in July as of yesterday, according to indexes compiled by Bank of America Merrill Lynch. Their German counterparts rose 1.4 percent, while Spanish debt lost 0.5 percent.
U.S. policy makers may refrain from starting new bond purchases, according to 88 percent of economists surveyed by Bloomberg. Forty-eight percent say the FOMC will announce the buying at its Sept. 12-13 meeting, according to the July 25-27 survey of 58 economists.
“The most likely outcome from the current meeting is some modest downgrade of the language pertaining to the economic assessment,” wrote Joe LaVorgna, chief U.S. economist at Deutsche Bank AG in New York, in a note to clients. “The easing bias will remain in place, but no further action will be taken. At most, we think policy makers could extend their Fed funds guidance from late 2014 to late 2015.”
The benchmark rate has been in a range between zero and 0.25 percent since December 2008.
Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said governments may turn to financial repression and various forms of quantitative easing to inflate asset values as equities fail to match historical returns.
“Unfair though it may be, an investor should continue to expect an attempted inflationary solution in all almost all developed economies over the next few years and even decades,” Gross wrote. “The cult of equity may be dying, but the cult of inflation may have only just begun.”
The so-called Siegel Constant, which purports to show a long-term history of inflation-adjusted equity real returns of 6.6 percent since 1912, may be a “historical freak” unlikely to be seen again, Gross said in his monthly investment outlook posted on the Newport Beach, California-based company’s website today.
Fed Chairman Ben S. Bernanke said on July 17 that policy makers are “looking for ways to address the weakness in the economy should more action be needed.” The U.S. central bank said in January that its benchmark interest rate will stay at “exceptionally low levels” at least through late 2014, extending its pledge from the middle of 2013.
European Central Bank officials meet to review monetary policy in Frankfurt on Aug. 2.
The Fed purchased $4.78 billion of Treasuries maturing in July 2018 to July 2019 today. The purchases are part of its plan to swap short-term debt in its holdings for longer maturities.
The U.S. Treasury Department raised its net borrowing estimate for the current quarter, reflecting in part lower revenue, higher spending and higher issuances of state and local government securities.
The Treasury increased its estimate for July to September to $276 billion, which is $12 billion higher than projected in April. Treasury officials see net borrowing of $316 billion in the quarter starting Oct. 1. In the quarter that ended June 30, the Treasury borrowed $172 billion, compared with a previous estimate of $182 billion.
The Treasury will make its so-called quarterly refunding announcement on Aug. 1. The government has sold $32 billion in three-year notes, $24 billion in 10-year debt and $16 billion in 30-year bonds each refunding month since November 2010. Quarterly refundings are held each February, May, August and November.
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