Tags: Treasuries | Gain | Bernanke | Purchases | Support | Economy

Treasuries Gain After Bernanke Says Purchases Support Economy

Tuesday, 05 Oct 2010 07:55 AM

Treasuries rose for a second day after comments from Federal Reserve Chairman Ben S. Bernanke increased speculation the central bank is preparing to boost purchases of U.S. government debt.

Two-year yields were about one basis point away from a record low after Bernanke said the central bank’s first round of so-called quantitative easing improved the economy and additional buying will probably help more. Pacific Investment Management Co., which runs the world’s biggest mutual fund, said the Fed will probably expand its buying program as it tries to revive a U.S. economy that is almost stalled.

“They’re laying the groundwork for more quantitative easing” in the U.S., said Peter Jolly, the Sydney-based head of market research for the investment-banking unit of National Australia Bank Ltd., the nation’s largest lender by assets. “The initial impact has to be lower yields.”

The benchmark 10-year rate dropped two basis points to 2.46 percent as of 6:14 a.m. in London, according to BGCantor Market Data. The 2.625 percent security due in August 2020 gained 6/32, or $1.88 per $1,000 face amount, to 101 14/32.

Two-year notes yielded 0.41 percent, compared with the record low of 0.3987 percent set yesterday.

“The additional purchases -- although we don’t have precise numbers for how big the effects are -- I do think they have the ability to ease financial conditions,” Bernanke said yesterday at a forum with college students in Providence, Rhode Island. He said the first wave that ended in March was an “effective program.”

Fed Buying

The Fed snapped up $300 billion of Treasuries last year.

The central bank said in August it would reinvest proceeds from maturing mortgage holdings into government debt. It is scheduled to buy Treasuries due from September 2016 to August 2020 today and from March 2013 to August 2014 tomorrow.

Now policy makers are debating whether to add securities to the central bank balance sheet with additional purchases.

“A new round of quantitative easing is likely,” Pimco’s Paul McCulley, who is based in Newport Beach, California, wrote in a report on the company’s website. “The bottom line for the U.S. is a growth trajectory so slow you’d nearly call it stalled.” McCulley published his report before Bernanke spoke.

U.S. government securities also rose after the Reserve Bank of Australia refrained from raising borrowing costs at a meeting today. Nineteen of 25 economists surveyed by Bloomberg News predicted an increase.

Australian one-year yields dropped 16 basis points to 4.57 percent, according to data compiled by Bloomberg.

Japanese Bonds

Japan’s 10-year yield dropped one basis point to 0.925 percent after the central bank cut its benchmark interest rate to a range of zero to 0.1 percent and set up a fund that will buy 3.5 trillion yen ($41.8 billion) of government debt.

Banks and securities firms that are forecasting lower U.S. yields are in the minority, Bloomberg surveys show. The 10-year rate will climb to 3.91 percent by year-end, based on a survey that gives the heaviest weightings to the most recent forecasts.

“Treasuries are OK for people who can trade them quickly but I don’t recommend buying and holding them,” said Hiroki Shimazu, an economist in Tokyo at Nikko Cordial Securities Inc., part of Sumitomo Mitsui Financial Group Inc., Japan’s third- largest publicly traded bank by assets. “I’m really surprised that the Fed isn’t satisfied with this recovery.”

Claims for unemployment insurance are declining, the housing market has stabilized and consumer spending is gaining, Shimazu said. Ten-year yields will climb to 3.50 percent this year, he said.

‘Growth Economy’

“We continue to see what we believe to be a slow-growth economy, but still a growth economy,” Charles “Wick” Moorman, chief executive of Norfolk Southern Corp. the second-largest U.S. railroad by market capitalization, said in a Bloomberg Television interview Sept. 29.

An industry report today will show service industries picked up in September, a Bloomberg survey shows.

New York Fed President William Dudley said last week the outlook for job growth and inflation is “unacceptable” and the central bank will probably need to take action.

Bank of America Merrill Lynch, one of the 18 primary dealers that are required to bid at the government’s debt sales, recommended 10-year notes in a report Oct. 1.

“The market has room to rally,” strategists Priya Misra and Brian Smedley wrote. “We continue to expect lower rates as the Fed announces an expansion of the balance sheet in coming months.”

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Treasuries rose for a second day after comments from Federal Reserve Chairman Ben S. Bernanke increased speculation the central bank is preparing to boost purchases of U.S. government debt.Two-year yields were about one basis point away from a record low after Bernanke said...
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Tuesday, 05 Oct 2010 07:55 AM
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