Treasurys rose, pushing 10-year note yields down the most since 2008, as investors snapped up Treasurys amid expectations that the Federal Reserve’s pledged to keep its benchmark rate on hold signals a slow economic recovery.
U.S. debt extended gains after a measure of consumer sentiment fell more than forecast 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 Treasurys 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.
“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 Treasurys benefit from the fear trade.”
Ten-year yields declined 10 basis points to 2.24 percent as of 2:24 p.m. in New York, according to Bloomberg Bond Trader prices. The 2.125 percent note maturing in August 2021 rose 28/32, or $8.75 per $1,000 face amount, to 98 31/32.
The yield fell as much as 12 basis points today and 52 basis points this week, the most since December 2008. The record low yield was 2.0346 percent set Aug. 9.
U.S. two-year yields slid to 0.1568 percent on Aug. 9, the least ever.
“There’s a significant re-pricing in the Treasury market,” said Rasmus Rousing, a fixed-income strategist at Credit Suisse Group AG in Zurich. Yields are “reflecting growth concerns.”
Treasurys 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.
Volatility in the Treasury market has picked up. Merrill Lynch & Co.’s MOVE index, which measure price swings in Treasurys 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 Treasurys 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.”
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 Treasurys,” 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 Treasurys 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.
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. Treasurys 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.
“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.
“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.
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