Treasuries 10-year note yields traded close to two-month lows as Federal Reserve policy makers said the central bank may need to increase bond purchases next year to boost the economic recovery.
The benchmark note rallied for the fifth straight day as President Barack Obama said the U.S. can’t afford to extend Bush tax cuts for the wealthy as lawmakers seek to address the budget deficit and avoid the so-called fiscal cliff. The difference between the yield on the two-year note and the 10-year security narrowed to almost the least in two months.
“Yields are not all that attractive, but bonds continue to be a relative safe haven,” said Brian Edmonds, head of interest rates at Cantor Fitzgerald LP, in New York one of 21 primary dealers that trade with the Fed. “The stock market is probably nervous about the fiscal cliff. What will probably happen is that we’ll kick the can down the road.”
The benchmark 10-year yield dropped to 1.59 percent at 4:59 p.m. in New York, according to Bloomberg Bond Trader prices. The price of the 1.625 percent note due in November 2022 rose 1/32 or 31 cents per $1,000 face amount to 100 10/32. The yield dropped to 1.57 percent yesterday, the lowest level since Sept. 5. It climbed as high as 1.63 percent today.
“There’s not enough motivation to break us through to a lower-yield range,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “We’ve reached a zone where the Treasury market is consolidating.”
The so-called yield curve measuring the gap between yields on two- and 10-year debt widened to 1.35 percentage points, after dropping to 1.32 percentage points yesterday. It steepened to a 2012 high of 2 percentage points in March.
A yield curve plots the rates of bonds of the same quality, but different maturities. It steepens when yields on shorter- maturity notes fall, those on longer-dated bonds rise, or both happen simultaneously.
In minutes released today, a number of Fed officials said the central bank may need to expand its monthly purchases of bonds next year after the expiration of Operation Twist in December.
“A number of participants indicated that additional asset purchases would likely be appropriate next year after the conclusion of the maturity-extension program,” according to the record of the Federal Open Market Committee’s Oct. 23-24 gathering released today in Washington.
“Everyone expected there was a significant chance we would get more QE,” Cantor Fitzgerald’s Edmonds said. “We have the FOMC continuing to buy bonds.”
The Fed is swapping short-term Treasuries in its holdings with those due in six to 30 years to put downward pressure on borrowing costs. The central bank sold $7.67 billion of securities due from May 2015 to June 2015 today, according to the Fed Bank of New York’s website.
The minutes also show a detailed discussion about whether the central bank should link its policy of holding the main interest rate at zero to numerical measurements of unemployment and inflation, an approach that participants “generally favored” over the current approach of specifying a calendar date through which rates will remain low.
The Standard & Poor’s 500 dropped 1.4 percent today. It has fallen 5.1 percent since Obama was re-elected.
Treasuries investors increased bullish positions to the most in almost four months in the week ending yesterday, according to a survey by JPMorgan Chase & Co.
The proportion of net longs was at 11 percentage points, up from four percentage point, according to the survey.
The percent of outright longs rose to 26 percent, from 17 percent the previous week, the survey said. The percent of outright shorts, or bets the securities will fall in value, rose to 15 percent, from 13 percent, according to the survey. Investors cut neutral bets to 59 from 70, which was the highest level since August.
Previous budget negotiations that resulted in an extension of the Bush tax cuts were a “one-time proposition,” Obama told reporters today at a White House press conference. “We were still very much in the early parts of recovering” from recession.
The Congressional Budget Office has forecast that the $607 billion of automatic tax increases and spending cuts set to take effect in January unless a budget agreement is reached would push the economy into a recession next year.
U.S. government securities retreated from the most expensive levels in almost six weeks, reached yesterday. The 10- year term premium, a model created by economists at the Fed that includes expectations for interest rates, growth and inflation, was negative 0.92 percent. It touched negative 0.94 percent yesterday, the most costly since Oct. 3. A negative reading indicates investors are willing to accept yields below what’s considered fair value. The average this year is negative 0.76 percent.
Treasury 10-year yields will climb to 2.01 percent by June 30, according to a Bloomberg survey of financial companies with the most recent projections given the heaviest weightings.
Retail sales in the U.S. fell in October for the first time in four months, influenced by the effects of superstorm Sandy, which hurt receipts for some and helped for others.
The 0.3 percent drop followed a 1.3 percent increase in September that was larger than previously reported, Commerce Department figures showed today in Washington. The median forecast of 83 economists surveyed by Bloomberg called for a drop of 0.2 percent. The Commerce Department said it was able to collect information from the storm-affected area, even as it was not able to quantify its impact.
Wholesale prices in the U.S. unexpectedly fell in October for the first time in five months as energy and vehicle costs dropped. The 0.2 percent decline in the producer price index came after a 1.1 percent increase the prior month, Labor Department figures showed. The median estimate in a Bloomberg survey of 73 economists called for a 0.2 percent rise. Excluding volatile food and energy, the so-called core measure decreased 0.2 percent, the first drop since November 2010.
The difference between yields on 10-year notes and similar- maturity inflation-linked bonds, a gauge of expectations for consumer prices, was at 2.39 percentage points, the narrowest since Sept. 13.
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