Tags: Two-Year Bond Yield Falls to Record Low Ahead of Fed Decision

Two-Year Bond Yield Falls to Record Low Ahead of Fed Decision

Tuesday, 21 Sep 2010 12:19 PM

Treasuries rose, pushing two-year yields to a record low, and U.S. stocks fluctuated before the Federal Reserve’s statement on interest rates and the economy. Irish and Spanish bonds climbed after the countries sold debt, while the euro strengthened and crude oil retreated.

The two-year Treasury yield fell to as low as 0.4479 percent as of 11:16 a.m. in New York and 10-year yields slipped 3 basis points to 2.68 percent. The Standard & Poor’s 500 Index was little changed near the 1,142 level after closing at a four- month high yesterday. The extra yield demanded to hold 10-year Irish bonds over German debt narrowed to 3.83 percentage points after topping 4 points for the first time yesterday.

The rally in Treasuries came as some investors speculated the Fed will indicate it’s open to increasing purchases of U.S. debt, a process known as quantitative easing, if the economic rebound slows further. U.S. government notes followed European bonds higher after auctions in Spain and Ireland eased concern that the region’s most indebted nations will struggle to fund budget deficits.

“It seems people have been factoring in a quantitative- easing announcement of some sort for this afternoon,” Nicolas Lenoir, chief market strategist at ICAP Futures LLC in Jersey City, New Jersey, said in a note to clients. “Given the economic slowdown we are witnessing, a lot of the uptick in equities must be relying on the expectation that the Fed will backstop not only the market but also the economy.”

Fed Watch

The S&P 500, which has rallied almost 9 percent in September, drifted between gains and losses today. The S&P 500 has risen on 75 percent of the days since March 2009 when the Fed announced its interest-rate decisions, according to Rob Leiphart of Birinyi Associates Inc.

Toll Brothers Inc. and D.R. Horton Inc. paced gains in all 12 stocks in a gauge of homebuilders after housing starts increased more than estimated.

Builders broke ground on 598,000 homes at an annual rate in August, the most since April, following a 541,000 pace in July, the Commerce Department said. Economists forecast August starts at a 550,000 pace, based on the median estimate in a Bloomberg News survey. Building permits, a proxy of future activity, rose from a record low.

The Fed will leave unchanged the sentence in its statement saying high unemployment and low inflation warrant “exceptionally low” rates for an “extended period,” according to 54 of 63 economists in a Bloomberg News survey from Sept. 16 to 17. The central bank will hold off from expanding its balance sheet by purchasing securities, according to 60 of 64 analysts.

European Bonds

The rally in European bonds came as Ireland sold 1.5 billion euros of bonds repayable in 2014 and 2018, with investors bidding for more than five times the amount of bonds available. Ireland’s 10-year government bond yield decreased 21 basis points to 6.27 percent.

Spain sold 12-month bills at an average yield of 1.908 percent, compared with 1.836 percent at an auction on Aug. 17, and 18-month bills at an average yield of 2.146 percent, compared with 2.078 percent at the prior sale. The yield on its 10-year bond dropped 3 basis points to 4.19 percent.

The Spanish 10-year gap with bunds shrank by 2 basis points to 1.74 percentage points. The spread on 10-year Portuguese bonds narrowed by 8 basis points to 3.83 percentage points over bunds, after central bank Governor Patrick Honohan said the government needs to cut the budget deficit at a faster pace to shore up investor confidence.

Default Swaps

The cost of credit-default swaps to insure European sovereign debt declined, with contracts on Ireland dropping 24 basis points to 421.5, Spain falling 2 basis points to 234, Greece down 11 basis points at 833 and Italy slipping 1 basis point to 193, according to data provider CMA.

Four months after an EU bailout, Germany’s biggest bond dealers say the worst is over for the region’s most-indebted nations. Yields on government bonds of Greece, Spain, Ireland and Portugal will fall to within 2.2 percentage points of benchmark German bunds on average in the next two years, according to a Bloomberg News survey of 15 banks that trade directly with Germany’s debt agency.

Bond dealers are confident that deficit-reduction measures will be enough to damp speculation the 16-nation currency union is in jeopardy of falling apart. The euro appreciated 0.5 percent to $1.3127 as it strengthened against 12 of 16 major currencies.

European Stocks

About two stocks rose for every one that fell in Europe’s Stoxx 600, and the MSCI Asia Pacific Index advanced 0.2 percent. Safran SA rallied 6.9 percent after Bank of America Corp. recommended buying shares in Europe’s second-biggest aircraft- engine maker. Cairn Energy Plc climbed 3.1 percent after saying an exploration well in Greenland has found its first pockets of oil and gas. UniCredit SpA fell 0.9 percent as people familiar with the matter said Chief Executive Officer Alessandro Profumo may step down at a board meeting today after losing the support of some investors.

Rubber futures rose as high as 305.9 yen a kilogram ($3,574 a metric ton), the most since April 30, on the Tokyo Commodity Exchange. Cotton futures advanced as much as 2.6 percent to $1.0197 a pound on ICE Futures U.S. in New York. They reached a 15-year high of $1.0198 yesterday. Crude oil fell 0.7 percent to $74.35 a barrel on the New York Mercantile Exchange.

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