Bloomberg News

U.S. 10-Year Yields Approach Four-Week Low After Bernanke Speech

August 31, 2012

Treasuries rose, pushing 10-year yields to the lowest in almost four weeks, as Federal Reserve Chairman Ben S. Bernanke said he wouldn’t rule out a third round of bond buying under quantitative easing to spur growth.

Thirty-year bond yields dropped after Bernanke told central bankers and economists at the Kansas City Fed’s annual symposium in Jackson Hole, Wyoming, that labor-market stagnation is a “grave concern.” Ten- and 30-year securities gained for a second week. Treasuries still lost 0.4 percent in August, paring their 2012 return to 2.3 percent, according to Bank of America Merrill Lynch indexes.

Bernanke “is concerned,” said Justin Lederer, an interest rate strategist at Cantor Fitzgerald LP in New York, one of 21 primary dealers that trade with the Fed. “He didn’t state anything definitive, but they are there to act. It definitely feels like it will be in the next few months.”

The 10-year note yield slid eight basis points, or 0.08 percentage point, to 1.55 percent at 4:59 p.m. New York time, according to Bloomberg Bond Trader prices. It touched 1.54 percent, the lowest level since Aug. 6, reaching below its 50- day moving average of 1.59 percent. The price of the 1.625 percent security maturing in August 2022 gained 22/32, or $6.88 per $1,000 face amount, to 100 22/32.

The benchmark yield, which rose earlier to 1.66 percent, slid 14 basis points this week.

The yield on the two-year note fell by as much as four basis points, the biggest intraday drop since March 15, to 0.22 percent. The U.S. sold $35 billion of the securities this week, part of $99 billion in note auctions.

Long Bonds

Thirty-year bond yields decreased seven basis points to 2.67 percent and touched 2.66 percent, the lowest since Aug. 7. The long-bond yields fell 13 basis points on the week.

“The fact that QE3 is still a very real possibility has the longer end of the Treasury market maintaining its underlying strength,” said Jeffrey Caughron, a partner at Baker Group LP in Oklahoma City who advises community banks on more than $30 billion of investments. “The expectation of a lot of market participants was that he would be more clear and forceful, but it is appropriate for him to be careful at this point.”

The yield difference between 10- and 30-year Treasuries widened to 1.12 percentage points, the most since May 16.

Bernanke, lamenting the suffering caused by unemployment of more than 8 percent and defending his unprecedented actions, told the annual forum that “nontraditional policies” shouldn’t be ruled out if economic conditions warrant. He emphasized that a new round of bond purchases is an option.

FOMC Meeting

The remarks came two weeks before he leads a meeting of the Federal Open Market Committee to decide whether an expansion of the Fed’s record stimulus is needed to spur growth.

“The sentiment is that the Fed will be doing more security purchases and expanding the balance sheet yet another time,” said Mark MacQueen, partner and money manager in Austin, Texas, at Sage Advisory Services Ltd., which oversees $10 billion. “He somewhat reassured the market that he’s willing to do more. That was better than expected.”

Treasuries jumped to the most expensive level in a month. The 10-year term premium, a model created by economists at the Fed that includes expectations for interest rates, growth and inflation, was negative 0.97 percent, the most costly since July 25. A negative reading indicates investors are willing to accept yields below what’s considered fair value. The average for this year is negative 0.73 percent.

Sustainable Improvement

The FOMC next meets Sept. 12-13. Many policy makers at the committee’s last meeting said additional stimulus probably will be needed soon unless the economy showed a “substantial and sustainable strengthening,” according to minutes of their July 31-Aug. 1 discussions.

Bernanke’s speeches at the past two Jackson Hole conferences signaled central-bank moves to spur economic growth. The Fed chief said in his remarks in August 2010 the central bank “will do all that it can” to ensure a continuation of the economic recovery and that more securities purchases might be warranted if growth slowed. Policy makers announced a $600 billion round of Treasury purchases in November 2010.

At the August 2011 conference, Bernanke said the Fed “has a range of tools that could be used to provide additional monetary stimulus.” The central announced on Sept. 21 a program, dubbed Operation Twist, to swap shorter-term Treasuries in its holdings with longer-term securities to put downward pressure on borrowing costs.

Balance Sheet

The Fed has expanded its balance sheet with two rounds of quantitative easing to spur the economy. In the first, starting in 2008, it bought $1.25 trillion of mortgage-backed securities, $175 billion of federal agency debt and $300 billion of Treasuries. In the second round, announced in November 2010, the Fed bought $600 billion of Treasuries.

Treasuries rose yesterday as data showing slower inflation bolstered speculation Bernanke has more room to add monetary stimulus. Commerce Department data showed a gauge of prices tied to consumer spending advanced 1.3 percent in the 12 months ended in July, the smallest gain since October 2009.

The central bank’s favored bond-market gauge of inflation expectations was at 2.54 percent on Aug. 28, down from a 2012 high of 2.78 percent on March 19. The five-year, five-year forward break-even rate shows how much traders anticipate consumer prices will rise during a period of five years starting in 2017. The average over the past decade is 2.75 percent.

The Fed’s mandate from Congress is to aim for maximum employment and stable prices.

U.S. employers added 125,000 jobs in August, fewer than the 163,000-position increase in July, economists in a Bloomberg News survey forecast before the Labor Department reports the data on Sept. 7. The unemployment rate will remain at 8.3 percent, they projected.

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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