Bloomberg News

Treasuries Fall as Bernanke Says Deficit Deal Aids Growth

November 20, 2012

Treasuries fell as Federal Reserve Chairman Ben S. Bernanke said an agreement to reduce long-term U.S. deficits may remove an impediment to economic growth and crimp haven demand.

U.S. 10-year note yields rose to a one-week high after a report showed housing starts unexpectedly increased last month to a four-year high. Volatility in U.S. government bonds dropped to the lowest since 2007. The central bank purchased $1.85 billion in longer-term debt today as part of its so-called Operation Twist program to boost growth.

“There’s some optimism they will come to some agreement to address the fiscal cliff,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “The fiscal cliff is driving our market more than any other issue right now.”

The benchmark 10-year yield increased five basis points, or 0.05 percentage point, to 1.67 percent at 4:59 p.m. in New York, according to Bloomberg Bond Trader prices. The 1.625 percent security due in November 2022 dropped 15/32, or $4.69 per $1,000 face amount, to 99 20/32. The yield reached the highest level since Nov. 8.

The 30-year bond yield climbed six basis points to 2.82 percent, set for the longest streak of increases since the five days ended Aug. 9.

Position Protection

“A majority of traders are taking chips off the table,” said Michael Franzese, senior vice president of fixed-income trading at ED&F Man Capital Markets in New York. “If they reach an agreement, Treasuries will go up in yields.”

The Securities Industry and Financial Markets Association recommends a full market close Nov. 22 for the Thanksgiving Day holiday and an early close at 2 p.m. New York time on Nov. 23.

Volatility in U.S. government bonds dropped to the lowest in more than five years before the U.S. Thanksgiving holiday. Bank of America Merrill Lynch’s MOVE index, which measures price swings for Treasuries based on options, fell to 54.7 yesterday, the least since June 2007.

Treasury trading volume rose to $233.4 billion as of 4:01 p.m., from $177 billion yesterday. That figure compares with the 2012 daily average of $241 billion, according to ICAP Plc, the largest inter-dealer broker of U.S. government debt.

“We’ll see nothing major until there’s an announcement from Washington,” said Justin Lederer, an interest-rate strategist at primary dealer Cantor Fitzgerald LP in New York. Investors are watching for any progress on the fiscal cliff, he said.

Budget Talks

The fiscal cliff refers to $607 billion of tax increases and spending cuts that will automatically come into force at the beginning of 2013 unless lawmakers act. President Barack Obama wants to impose higher taxes on the wealthy and reduce spending while Republican lawmakers oppose raising taxes.

“Cooperation and creativity to deliver fiscal clarity --in particular, a plan for resolving the nation’s longer-term budgetary issues without harming the recovery -- could help make the new year a very good one for the American economy,” Bernanke said today in a speech in New York to the Economic Club of New York. “Failure to avoid the so-called fiscal cliff would pose a substantial threat to the recovery.”

The Fed’s next policy meeting is Dec. 11-12.

Bernanke said U.S. central bankers are looking “very carefully” at proposals to link changes in monetary policy to specific economic thresholds, such as the jobless rate which stood at 7.9 percent in October.

Fund Target

The Fed now ties its outlook for the benchmark interest rate to a calendar date. The central bank has said the federal funds rate, which was set to the zero to 0.25 percent level in December 2008, is likely to remain “exceptionally low” at least through mid-2015.

The central bank bought Treasuries maturing from February 2036 to May 2042 today to help cap borrowing costs, according to the Fed Bank of New York’s website.

Treasuries have returned 2.7 percent this year as of Nov. 19, according to Bank of America Merrill Lynch indexes. The MSCI All-Country World Index (MXWD) of stocks handed investors an 11 percent gain, according to data compiled by Bloomberg.

Treasuries remained lower as housing starts rose 3.6 percent to a 894,000 annual rate, the fastest since July 2008, after a 863,000 pace in September, Commerce Department figures showed today in Washington. The median estimate of 82 economists surveyed by Bloomberg called for starts to fall to 840,000.

Economic Data

“The market reaction is muted, primarily because while the data is showing us some signs of strength, it’s kind of taking a back seat to what’s going on in Washington,” said Thomas Simons, a government-debt economist in New York at Jefferies Group Inc., one of 21 primary dealers that trade with the central bank. “It’s a thin week.”

Treasuries were supported earlier as Moody’s Investors Service cut France’s top credit rating after the market closed yesterday to Aa1 from Aaa, boosting demand for the safest assets.

Investors in Treasuries cut bullish bets this week after increasing them to the most in almost four months the week after Obama won re-election, according to a survey by JPMorgan Chase & Co.

The proportion of net longs was at two percentage points in the week ending yesterday, according to JPMorgan, down from 11 percentage points the week ending Nov. 13. Investors raised neutral bets to 68 percent from 59 percent, the survey reported.

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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