The extra yield Treasury investors get to hold 30-year bonds instead of two-year notes was the lowest in more than a year on bets the Federal Reserve will increase holdings of longer maturities to limit borrowing costs.
U.S. 10-year yields on Tuesday dropped for a third day after the International Monetary Fund lowered its global growth forecast, citing Europe’s sovereign-debt crisis and a potential American fiscal impasse. Two-year note yields touched a record low as the Federal Open Market Committee began a two-day meeting.
“Treasuries have stayed near these levels because as an investor, you don’t want to fight the Fed, especially when it’s going to announce something,” said Larry Milstein, managing director of government and agency debt trading in New York at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors.
Yields on 30-year bonds dropped two basis points, or 0.02 percentage point, to 3.2 percent at 5:15 p.m. in New York, according to Bloomberg Bond Trader prices. The 3.75 percent securities due in August 2041 increased 10/32, or $3.13 per $1,000 face amount, to 110 15/32.
Two-year note yields were little changed at 0.16 percent after touching a record low 0.1431 percent. The difference between 30- and two-year yields was 304 basis points, the lowest since August 2010, when it touched 299.5 basis points. The 30-year bond yields fell Monday to 3.18 percent, the lowest since January 2009.
Benchmark 10-year note yields were at 1.94 percent, compared with a record low 1.8770 percent reached last week. Five-year note yields were at 0.84 percent.
Fed Debt Buying
The Fed will decide to replace short-maturity Treasuries in its portfolio with longer-term bonds, according to 71 percent of 42 economists surveyed by Bloomberg. Such a policy is known as Operation Twist because of the goal of bending the yield curve.
Pacific Investment Management Co.’s Bill Gross, who oversees the world’s biggest bond fund manager, said in Twitter post that a further rally in Treasuries is “dependent on QE3 expansion of balance sheet or new ‘language.”
Credit Suisse Group AG said the Fed may announce a $360 billion “Operation Twist” move Wednesday, selling $60 billion in one- to three-year Treasuries and buying $60 billion in seven- to 10-year debt per month for six months, strategists led by Carl Lantz, head of interest-rate strategy in New York at the primary dealer, wrote in a note to clients.
Traders trimmed bets on inflation to the lowest in 11 months on speculation global growth will slow. The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of consumer-price expectations, shrank to as narrow as 1.83 percentage points Tuesday, the least since Oct. 5 of last year.
U.S. housing starts dropped 5 percent to a three-month-low annual rate of 571,000, the Commerce Department reported Tuesday in Washington. The median forecast of 78 economists in a Bloomberg News survey was for a 2.3 percent drop.
The world economy will expand 4 percent this year and next, the IMF said, compared with June forecasts of 4.3 percent in 2011 and 4.5 percent in 2012. The U.S. growth projection for 2011 was lowered to 1.5 percent this year from 2.5 percent.
“Global activity has weakened and become more uneven, confidence has fallen sharply recently, and downside risks are growing,” the IMF said in its World Economic Outlook report. In Europe “leaders must stand by their commitments to do whatever it takes to preserve trust in national policies and the euro” while in the U.S. “deep political divisions leave the course of U.S. policy highly uncertain.”
Treasuries have returned 8.6 percent in 2011, heading for their best year since 2008, according to Bank of America Merrill Lynch indexes.
Italy’s credit rating was cut one level to A by Standard & Poor’s, which said the outlook remains “negative.” The firm said Monday the nation’s net general government debt is the highest among A rated sovereigns and now expects it to peak later and at a higher level than previously anticipated.
The European Central Bank bought Italian government bonds, according to people with knowledge of the transactions who asked not to be identified because the deals are confidential. A spokeswoman for the central bank declined to comment.
“The ECB seems very keen on preventing any spiraling out of this news,” said David Schnautz, a London-based fixed-income strategist at Commerzbank AG.
Greece said Finance Minister Evangelos Venizelos held a “productive” conference call with European officials Monday on the country’s bailout. Prime Minister George Papandreou’s government was scheduled to hold more talks Tuesday as European leaders debate the terms of a July agreement and the prospect of their being forced to send more aid to keep Greece in the currency union.
Investors in Treasuries increased neutral positions in the securities for the first time in four weeks, according to a survey by JPMorgan Chase & Co.
About 74 percent of the clients surveyed by the firm were neutral in the week ended Sept. 19, up from 72 percent in the previous week. The amount of so-called longs was unchanged at 11 percent. The percentage of investors who were “short” dropped to 15 percent.
JPMorgan doesn’t disclose the number of clients in the survey. Srini Ramaswamy, a JPMorgan strategist in New York, wasn’t immediately available to comment. A long is a bet an asset will gain in value.
The 10-year yield will increase to 2.96 percent by the end of September 2012, according to the average forecast in a Bloomberg survey of banks and securities companies, with the most recent forecasts given the heaviest weightings.
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