U.S. 10-Year Yield Weekly Drop Most Since 2008 on Fed’s View
August 12, 2011, 6:24 PM EDTStory Tools
By Cordell Eddings and Susanne Walker
Aug. 12 (Bloomberg) -- Treasuries rose, pushing 10-year note yields down the most since 2008, as investors snapped up Treasuries amid expectations that the Federal Reserve’s pledge to keep its benchmark rate on hold signals a slow economic recovery.
U.S. debt extended gains after a measure of consumer sentiment fell to the lowest since 1980 in August and New York President William Dudley said policy makers gave a “sober assessment” of the U.S. economy. Two- and 10-year note yields set record lows this week as investors purchased Treasuries on signs of a widening debt crisis in Europe and a signal by the Fed that it will leave the benchmark rate unchanged until at least mid-2013.
“The big picture is that price action is being driven by the Federal Open Market Committee, who put things on hold for some time,” said Sean Murphy, a trader at Societe Generale SA in New York, one of the 20 primary dealers that trade with the Fed. “The economic data will dictate how long we can stay at these levels. We are going to need seriously good numbers before the Fed changes their tone, and thus low rates for a long time.”
Ten-year yields declined nine basis points to 2.26 percent as of 5:02 p.m. in New York, according to Bloomberg Bond Trader prices. The 2.125 percent note maturing in August 2021 rose 24/32, or $7.50 per $1,000 face amount, to 98 27/32.
The yield fell as much as 12 basis points today and as much as 52 basis points this week, the most since December 2008. The record low yield was 2.0346 percent set Aug. 9.
Bond Returns
U.S. two-year yields slid to 0.1568 percent on Aug. 9, the least ever.
“At the end of the day, the Fed is on hold for two years,” said Charles Comiskey, head of Treasury trading at Bank of Nova Scotia in New York. “The flight-to-quality trade is still in vogue. Fear is still everywhere and Treasuries benefit from the fear trade.”
Treasuries have returned 6.4 percent this year, according to indexes complied by Bloomberg and the European Federation of Financial Analysts Societies. Japan’s government bonds have gained 1 percent, while German bunds have advanced 4.6 percent, the indexes show.
The median third quarter forecast for the yield on the 10- year note declined to 2.75 percent, according to a Bloomberg News survey Aug. 10, down from 3.29 percent in a survey Aug. 2. The security will end 2012 at 2.96 percent, from a previous forecast of 3.50 percent, survey found.
Price Swings
Volatility in the Treasury market has picked up. Merrill Lynch & Co.’s MOVE index, which measure price swings in Treasuries based on prices of over-the-counter options maturing in two to 30 years, touched 107.9 basis points yesterday, more than the 89.4 average since the start of the year.
The volume of Treasuries trading rose this week averaging $469.16 billion per day. That is more than the $317 billion daily average so far this year, according to ICAP Plc, the world’s largest interdealer broker.
“Treasury yields are too low for all but the most pessimistic economic environments,” Brett Rose, interest-rate strategist at Citigroup Global Markets in New York, wrote in a note to clients. “The Treasury market is pricing in a far too pessimistic outcome for the U.S. economy and would expect that 10-year Treasury yields will be 50 basis point higher in the medium term.”
Auction Yields
The Treasury Department paid an average yield of 2.13 percent on the three-, 10- and 30-year securities, less than the previous refunding auctions in May of 3 percent and below the former record of 2.59 percent in February 2009, according to data compiled by Bloomberg. The government began selling 30-year bonds on a regular schedule in 1977 as part of its so-called quarterly refunding.
“We’ve joined the crowd buying Treasuries,” said Wan- Chong Kung, a bond fund manager in Minneapolis at Nuveen Asset Management, which oversees more than $100 billion. “We recognize the heightened uncertainty and risk-off environment. The growth outlook has dimmed.”
The rally in Treasuries was interrupted yesterday as the Standard & Poor’s 500 Index surged 4.6 percent. The S&P rose 0.5 percent today.
“Not to rain on your parade, but be leery” of the “exuberance,” wrote Bill Gross at Pacific Investment Management Co., who runs the world’s biggest bond fund in Newport Beach, California.
Treasury Secretary
Former Treasury Secretary Henry Paulson said he would invest in U.S. government securities before other sovereign debt even though the nation’s political process isn’t working at a “AAA level.”
“Our political process, our government, hasn’t been working at a AAA level,” Paulson, 65, said yesterday. “I would take U.S. Treasuries over other sovereign debt, other AAA sovereign debt, any day of the week. That’s not to say we don’t have important issues to deal with in this country.”
The Fed responded to the slowdown in growth by announcing on Aug. 9 that it plans to keep its benchmark interest rate at a record low through the middle of 2013.
The Thomson Reuters/University of Michigan preliminary August index of consumer sentiment fell to 54.9 from 63.7 a month earlier, the group reported today.
The median forecast of 69 economists surveyed by Bloomberg News projected a reading of 62. Estimates ranged from 59 to 66.5. The index averaged 89 in the five years leading up to the recession that began in December 2007.
Slow Growth
“Economic growth so far in 2011 has been quite a bit slower than we expected earlier in the year,” Dudley said in the text of remarks given at the bank’s New York headquarters today. “In the last few months conditions in the labor market have deteriorated again and the unemployment rate edged up. Household spending has flattened out, and the housing sector is depressed.”
The policy-setting Federal Open Market Committee this week pledged to keep its benchmark interest rate near zero until at least mid-2013 to revive an economic recovery that’s “considerably slower” than anticipated. Fed officials also “discussed the range of policy tools” available to boost growth and are “prepared to employ those tools as appropriate,” the FOMC said.
The 0.5 percent retail sales increase reported by the Commerce Department in Washington today matched the median forecast of 81 economists surveyed by Bloomberg News and followed a 0.3 percent increase in June that was larger than previously estimated. Excluding auto sales, purchases rose more than projected.
Economic Glimmer
“The numbers were in line with expectations,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “You’re seeing some of the most recent data as showing some optimism in the U.S. economy.”
France, Spain, Italy and Belgium plan to impose bans on short-selling today to stabilize markets. The European Central Bank is buying Italian and Spanish government bonds to counter a surge in yields.
France’s economy unexpectedly stalled in the second quarter, data showed today. Gross domestic product was unchanged from the first quarter, when it increased 0.9 percent. Economists forecast a 0.3 percent gain, the median of 15 estimates in a Bloomberg News survey showed.
“Data out of Europe may be having an impact on the market,” said Kornelius Purps, a fixed-income strategist at UniCredit SpA in Munich.
--With assistance from Emma Charlton in London. Editors: Paul Cox, Dennis Fitzgerald
To contact the reporter on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Susanne Walker in New York at swalker33@bloomberg.net
To contact the editor responsible for this story: Robert Burgess at bburgess@bloomberg.net
