Prices of U.S. Treasury securities climbed Monday on speculation Federal Reserve Chairman Ben S. Bernanke will use his Friday speech in Jackson Hole, Wyoming, to outline the case for further central-bank action to support the economy.
Ten-year securities extended gains from last week before the U.S. auctions $99 billion in notes this week. Chicago Fed President Charles Evans called for another round of bond purchases under quantitative easing. The central bank has already conducted two rounds to pump cash into the banking system. Bernanke said in a letter last week the Fed has the ability to take further steps to boost growth.
“More people are feeling comfortable that the Fed’s going to do more QE,” said Charles Comiskey, head of Treasury trading in New York at Bank of Nova Scotia, one of 21 primary dealers that trade Treasuries with the central bank. “There’s a lack of sellers. The auctions should go fine. These markets are manic -- they move on any piece of news.”
The benchmark 10-year yield fell four basis points, or 0.04 percentage point, to 1.64 percent at 2:06 p.m. in New York, according to Bloomberg Bond Trader data. The price of the 1.625 percent security due in August 2022 rose 3/8, or $3.75 per $1,000 face amount, to 99 26/32.
The yield slid 12 basis points last week. It touched a record low of 1.38 percent on July 25 and has averaged 3.73 percent for the past decade.
Thirty-year bond yields dropped five basis points to 2.75 percent after sliding 13 basis points last week.
Treasuries are the most expensive in three weeks, according to the term premium, a model created by economists at the Fed that includes expectations for interest rates, growth and inflation. The gauge was at negative 0.88 percent today, the costliest since Aug. 6. It reached negative 0.70 percent on Aug. 16, the least expensive since May. A negative reading indicates investors are willing to accept yields below what’s considered fair value.
The Treasury will auction $35 billion of two-year debt tomorrow, the same amount of five-year notes the following day and $29 billion of seven-year securities on Aug. 30.
Demand dropped below 2012 averages at the government’s last auctions of notes and bonds this month. A $24 billion sale of 10-year notes on Aug. 8 drew a bid-to-cover ratio, a gauge of demand that compares the amount bid with the amount offered, of 2.49, the lowest level since August 2009. The year-to-date average ratio is 3.09. A $16 billion offering of 30-year bonds on Aug. 9 had a ratio of 2.41, versus 2.6 for the year.
“These auctions will go very well,” Ray Remy, head of fixed income in New York at the primary dealer Daiwa Capital Markets America Inc., said of the sales scheduled this week. “There will be plenty of demand for fives and sevens because there’s a lot of dovish sentiment out of the Federal Open Market Committee minutes.”
Treasury 10-year notes snapped the longest weekly losing streak since 2010 on Aug. 24, rising for the first time in five weeks amid speculation the Fed will buy more debt under quantitative easing as global economic growth slows, renewing demand for safety.
Bernanke is scheduled to speak at the end of the week at the Kansas City Fed’s annual economic symposium in Jackson Hole.
“There is scope for further action by the Federal Reserve to ease financial conditions and strengthen the recovery,” he said in a letter dated Aug. 22 to Representative Darrell Issa, the California Republican who chairs the House Oversight and Government Reform Committee.
Bernanke repeated the statement from the FOMC’s Aug. 1 meeting that the Fed will provide “additional accommodation as needed.” Minutes of the meeting released last week showed many policy makers said additional stimulus probably will be needed soon unless the economy shows signs of a durable pickup.
“You know he wants to ease; the question is when,” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities Inc. in New York. “It’s a matter of timing and what’s going to give him the biggest bang for the easing dollar.”
The Chicago Fed’s Evans urged the central bank to begin a third round of debt purchases and to keep buying until U.S. unemployment declines for at least six months.
“These could be open-ended purchases, meaning that they would continue at a certain rate until there was clear evidence of improvement in economic conditions,” Evans said today in a speech in Hong Kong. “To me, one example of clear evidence would be a resumption of relatively steady monthly declines in unemployment for two or three quarters.”
The U.S. added 120,000 jobs in August, versus 163,000 in July, economists in a Bloomberg News survey forecast before a Labor Department report on Sept. 7. The unemployment rate will be 8.3 percent, economists forecast. It has remained above 8 percent since 2009.
Cleveland Fed President Sandra Pianalto said the recovery remains “frustratingly slow.” Additional bond purchases can boost growth if the risks are managed, and “justify more analysis,” she said today in remarks prepared for a speech in Newark, Ohio.
The Fed is also implementing a program to put downward pressure on borrowing costs by exchanging shorter-maturity Treasuries in its holdings for longer-term debt. It bought $1.8 billion of Treasuries today due from February 2036 to August 2042 as part of the plan, known as Operation Twist.
The difference in yields between 10-year notes and comparable Treasury Inflation Protected Securities, which represents traders’ expectations for the inflation rate over the life of the securities and is known as the break-even rate, was 2.31 percentage points today, down from the 2012 high of 2.45 percentage points on March 20.
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