Treasury 10-year note yields slid the most since August as Federal Reserve Chairman Ben S. Bernanke said the central bank would support the economy, and haven demand grew amid European turmoil and U.S. spending cuts.
U.S. government securities rose for a second week as Americans’ income fell the most in 20 years and inflation, as gauged by the Fed’s preferred measure, was unchanged in January. Bernanke signaled the central bank will keep buying bonds under its third round of quantitative easing. The jobless rate held at 7.9 percent last month, data next week may show.
“The market was priced for very little risk, which is very different than where it was last year,” said Michael Pond, head of global inflation-linked research in New York at Barclays Plc, one of 21 primary dealers that trade with the Fed. “Bernanke made it clear that monetary policy is not likely to change any time soon and QE3 will continue until the labor market improves substantially.”
The 10-year note yield dropped 12 basis points, or 0.12 percentage point, to 1.84 percent this week in New York trading, the biggest decline since the five days ended Aug. 31, according to Bloomberg Bond Trader prices. They sank 11 basis points in February. The 2 percent note due in February 2023 gained 1 3/32, or $10.94 per $1,000 face amount, to 101 14/32. Thirty-year bond yields fell 10 basis points to 3.05 percent.
Ten-year yields climbed 37 basis points in December and January as investors sought higher-yielding assets on speculation the Fed might scale back its bond-buying and Europe’s debt crisis had eased.
The Standard & Poor’s 500 (SPX) Index rose 0.2 percent this week after gaining 5 percent in January and 0.7 percent in December.
The Fed chairman indicated in congressional testimony Feb. 26-27 the central bank is prepared to keep buying bonds at its present pace. He dismissed concern that record easing risks sparking inflation or asset-price bubbles. The Fed purchases $85 billion of Treasury and mortgage debt a month, putting downward pressure on borrowing costs to fuel growth.
“Bernanke’s stay-the-course message set the tone for this week,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “There was no reluctance from him. He defended the asset purchases, suggesting they are not going to stop any time soon, and that will continue to support the Treasury market.”
U.S. government securities were also supported by elections in Italy this week that failed to give any political party a clear majority. That cast doubt on the stability of the next government and spurred bets the country’s commitment to austerity may be diluted, worsening Europe’s debt crisis.
Hedge-fund managers and other large speculators increased to the highest level this year their net-long position in 10- year note futures in the week ending Feb. 26, according to U.S. Commodity Futures Trading Commission data.
Speculative long positions, or bets prices will rise, outnumbered short positions by 115,908 contracts on the Chicago Board of Trade, the most since Dec. 11. Net-long positions rose by 62,620 contracts, or 118 percent, from a week earlier, the biggest percentage gain since Jan. 25, the Washington-based commission said in its Commitments of Traders report.
Automatic reductions in federal spending set to begin yesterday in the U.S. may lower gross domestic product by 0.6 percentage point and cost 750,000 jobs by the end of 2013, according to the Congressional Budget Office. The cuts total $1.2 trillion over nine years, with $85 billion scheduled to go into effect in the remaining seven months of this fiscal year.
“There’s a lot of paralysis going on in D.C.,” George Goncalves, head of interest-rate strategy at the primary dealer Nomura Holdings Inc., said yesterday. “It’s not clear yet on how it’s going to go, so people are buying Treasuries first and asking questions later.”
Bonds initially pared gains yesterday as the Institute for Supply Management’s factory index advanced to 54.2 for February, from 53.1 in January. The Tempe, Arizona-based group’s figures exceeded the most optimistic forecast in a Bloomberg survey in which the median projection was 52.5. A reading greater than 50 signals expansion.
The Commerce Department reported that while consumer spending, which accounts for about 70 percent of the U.S. economy, rose 0.2 percent in January, incomes slid 3.6 percent.
The Fed’s preferred gauge of prices, called the core personal expenditures index because it excludes food and fuel, rose 0.1 percent in January, less than the 0.2 percent forecast, department data showed. It was little changed in December.
U.S. employers added 160,000 jobs in February, economists in a Bloomberg survey forecast before the Labor Department reports the data on March 8. Payrolls grew by 157,000 positions in January. The unemployment rate stayed at 7.9 percent, economists estimated.
The Treasury sold $99 billion of two-, five- and seven year notes this week. Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased an above-average amount of securities at each of the auctions.
Treasuries returned 0.6 percent in February, after losing 1 percent in January, according to Bank of American Merrill Lynch bond indexes. The S&P 500 rose 1.4 percent last month and gained 5.2 percent in January, including reinvested dividends.
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