Treasury Yields Plunge to Record Lows on Fed’s Slow-Growth View
Aug. 12 (Bloomberg) -- John Richards, head of North American Strategy at RBS Securities Inc., talks about his investment strategy for global stocks and Treasuries. Richards also discusses France's debt rating, the U.S. economy and Federal Reserve monetary policy. He speaks from Stamford, Connecticut with Susan Li on Bloomberg Television's "First Up." (Source: Bloomberg)
Treasury yields on debt maturing in 10 years and less fell to all-time lows as the Federal Reserve said economic growth was “considerably slower” than forecast and it would keep borrowing costs on hold through mid-2013.
The Treasury sold $72 billion of notes and bonds this week, with yields on three- and 10-year notes at record auction lows. The 10-year yield touched 2.0346 percent, an all-time low, amid concern the risk of recession is rising after Standard & Poor’s downgraded the U.S. credit rating to AA+ and as the European sovereign debt problems showed signs of spreading. Annual consumer inflation slowed in July, a report may show Aug. 18.
“What we’re witnessing is a reassessment of the health of the economy,” said James Collins, an interest-rate strategist in the futures group at Citigroup Inc.’s Global Markets unit in Chicago. “We could take another run toward 2 percent.”
U.S. 10-year note yields fell 30 basis points to 2.26 percent from 2.56 percent on Aug. 5, according to Bloomberg Bond Trader prices, the biggest drop on an intraday basis since December 2008. The 2.125 percent securities maturing in August 2021 finished the week at 98 27/32. It sold at a yield of 2.14 percent at the Aug. 10 auction.
The two-year Treasury yield dropped 10 basis points to 0.19 percent. The yield reached a record low of 0.1568 percent on Aug. 9.
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.
Treasury 30-year bonds tumbled Aug. 11, pushing yields up the most since 2008, as speculation Fed policies would stoke inflation sapped demand at the $16 billion offering of the securities. The sale drew the lowest level of demand since February 2009. Thirty-year bonds yields fell 12 basis points to 3.73 percent yesterday from 3.85 percent Aug. 5.
Volatility Treasuries trading 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 117.8 basis points Aug. 8, compared with the 89.4 average since the start of the year.
More Trade
The volume of Treasuries trading rose this week, averaging $420.32 billion per day, compared with the $317 billion daily average this year, according to ICAP Plc, the world’s largest interdealer broker.
Hedge-fund managers and other large speculators reversed from a net-short position to a net-long position in 10-year note futures in the week ending Aug. 9, according to U.S. Commodity Futures Trading Commission data.
Speculative long positions, or bets prices will rise, outnumbered short positions by 9,814 contracts on the Chicago Board of Trade. Last week, traders were net-short 72,946 contracts.
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, the survey found.
‘Too Low’
“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.”
New York Fed President William Dudley said yesterday policy makers gave a “sober assessment” of the U.S. economy after their Aug. 9 policy meeting.
“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 yesterday. “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.”
Fed officials “discussed the range of policy tools” available to boost growth and are “prepared to employ those tools as appropriate,” the Fed said.
Fed Hold
“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 6.3 percent this year, according to Bank of America Merrill Lynch data. Japan’s government bonds have gained 1 percent, while German bunds have advanced 4.6 percent, according to indexes complied by Bloomberg and the European Federation of Financial Analysts Societies.
The 0.5 percent retail sales increase reported by the Commerce Department in Washington yesterday 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.
Consumer Mood
The Thomson Reuters/University of Michigan preliminary August index of consumer sentiment fell to 54.9, the least 1980, from 63.7 a month earlier, the group reported yesterday. The median forecast of 69 economists surveyed by Bloomberg News projected a reading of 62. Estimates ranged from 59 to 66.5.
The consumer price index rose 0.2 percent in July after a 0.2 percent decline in June, according to the median of 64 economists forecasts in a Bloomberg News survey. Year-over-year, the CPI gained 3.3 percent, down from 3.6 percent, according to the survey.
France’s economy unexpectedly stalled in the second quarter, data showed yesterday. 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.
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.”
“I would take U.S. Treasuries over other sovereign debt, other AAA sovereign debt, any day of the week,” Paulson, 65, said Aug. 11 at Dartmouth College in Hanover, New Hampshire. “That’s not to say we don’t have important issues to deal with in this country.”
To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net
To contact the editor responsible for this story: Robert Burgess at bburgess@bloomberg.net
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