BlackRock Inc. and Pacific Investment Management Co. said the Federal Reserve will postpone tapering its bond purchases as a result of the debt-ceiling debate, helping support Treasurys.
U.S. government securities advanced for a second day as lawmakers agreed on a plan to end the federal shutdown that started Oct. 1 and to raise the borrowing limit, avoiding a default.
Congress produced the accord a day after Fitch Ratings said it may cut the U.S. AAA credit grade, citing the government’s inability to increase the debt ceiling in a timely manner.
“Because of the disruption, because of the uncertainty, what’s likely to happen is a slower pace of tapering by the Fed,” said Russ Koesterich, chief investment strategist at BlackRock Inc., the world’s largest money manager with $4.1 trillion in assets.
Falling consumer confidence will depress gross domestic product growth in the fourth quarter, New York-based Koesterich said on Bloomberg Television’s “First Up” with Susan Li.
The benchmark 10-year yield fell three basis points, or 0.03 percentage point, to 2.64 percent at 8:20 a.m. London time, according to Bloomberg Bond Trader prices. The 2.5 percent note due in August 2023 rose 1/4, or $2.50 per $1,000 face amount, to 98 26/32. Yields dropped six basis points Wednesday, the biggest decline since Sept. 18.
While the yield has advanced from a record low of 1.379 percent in July 2012, it’s below the average of about 6.40 percent since September 1981, the start of the three-decade bull market in bonds. Treasurys have fallen 2.5 percent this year, according to Bloomberg World Bond Indexes.
President Barack Obama just after midnight signed into law a measure to extend the nation’s borrowing authority into early 2014 and end the government shutdown that started Oct. 1.
The deal, which avoided a default of the world’s biggest economy and means that federal workers will return to their jobs from today, funds the government at Republican-backed spending levels through Jan. 15, 2014, and suspends the debt limit through Feb. 7.
In September, most Fed policy makers said the central bank will probably reduce bond purchases — used to support the economy by putting downward pressure on borrowing costs — this year from the current rate of $85 billion a month.
“Most participants viewed their economic projections as broadly consistent with a slowing in the pace of the committee’s purchases of longer-term securities this year and the completion of the program in mid-2014,” according to the record of the Federal Open Market Committee’s Sept. 17-18 gathering.
Central bankers will have to reassess how the government shutdown affected the economy, according to Mohamed El-Erian, chief executive officer at Pimco, which runs the world’s biggest bond fund and is based in Newport Beach, California.
“The Fed may now have no choice but to stay longer in its intense policy experimental mode — due both to the likelihood of weaker data and to a perceived need to take out insurance for the economy against future political dysfunction,” El-Erian wrote on the CNBC website.
The Fed Bank of Philadelphia’s general economic index fell to 15 in October from 22.3 the previous month, according to a Bloomberg News survey before the report today. Readings above zero signal growth. The Empire State index for the New York region fell to a five-month low of 1.5 in October, a report showed Oct. 15.
Policy makers including Fed Bank of New York President William Dudley are due to speak Thursday.
Rates on $120 billion of bills maturing today, when U.S. borrowing authority was scheduled to lapse, dropped to 0.035 percent Wednesday. They were as high as 0.51 percent Oct. 10.
The next securities due are $93 billion of debt maturing on Oct. 24. Rates on those bills touched 0.68 percent Wednesday before dropping to 0.19 percent Thursday. The rate was negative as recently as Sept. 27.
One-month rates were at 0.14 percent after touching 0.45 percent yesterday, the highest level since October 2008, according to data compiled by Bloomberg. The rate on bills due on Feb. 13 was little changed at 0.095 percent, compared with an average of 0.035 percent since the securities were issued.
Even at the height of concern about a default, yields remained lower than historical levels, with one-month rates averaging 1.5 percent in the past 10 years. During that time they climbed to a high of 5.26 percent in November 2006 and fell to as low as negative 0.09 percent in December 2008.
The U.S. is scheduled to announce today the size of a 30- year auction of Treasury Inflation Protected Securities set for Oct. 24. It will be $7 billion, according to economic advisory company Stone & McCarthy Research Associates.
The shutdown has shaved at least 0.6 percent from annualized fourth-quarter growth, Standard & Poor’s said. The ratings agency downgraded the U.S. on Aug. 5, 2011 by one step to AA-plus from AAA.
Fitch said this week the “prolonged negotiations” over the debt ceiling risk undermining confidence in the U.S. dollar as the global reserve currency.
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