Tags: Treasuries | Fed | Increase | Purchases

Treasuries Gain on Bets Fed to Increase Purchases

Tuesday, 14 September 2010 02:59 PM

Treasuries rose, pushing the 10-year note yield down the most in a week, on speculation the Federal Reserve will announce more purchases of the securities this year to keep borrowing costs low and support the recovery.

U.S. debt also advanced as a plunge in the dollar to a 15- year low against the yen made government securities cheaper to international investors. The extra yield traders demand to hold benchmark 10-year notes instead of 2-year debt dropped after increasing yesterday to the widest level since the Fed announced last month that it would resume buying government bonds.

“People are still underweight Treasuries,” said Thomas Tucci, head of U.S. government bond trading in New York at Royal Bank of Canada, one of the 18 primary dealers that trade directly with the Fed. “Any time there is a backup, foreign investors think it’s a good buy. They think there is value in this market.”

The yield on the 10-year note dropped 9 basis points, or 0.09 percentage point, to 2.67 percent at 2:45 p.m. in New York, according to BGCantor Market Data. The price of the 2.625 percent security maturing in August 2020 increased 23/32, or $7.19 per $1,000 face amount, to 99 5/8.

The 10-year note yield’s drop was the biggest since Sept. 7, when it fell as much as 11 basis points. The yield reached 2.85 percent yesterday, the highest level since Aug. 6. The yield will rise to 2.74 percent by year-end, according to the average forecast in a Bloomberg News survey of banks and securities companies, with the most recent forecasts given the heaviest weightings.

Two-Year Yield

The 2-year note yield slid 4 basis points to 0.50 percent after reaching the all-time low of 0.4542 percent on Aug. 24. The 30-year bond yield dropped 6 basis points to 3.79 percent.

Sentiment among Treasury note investors was more bullish, according to a weekly poll of clients by JPMorgan Chase & Co. The net percentage of investors holding notes rose to 17 percent as of yesterday, the most net longs since July 2009. The figure is up from 8 percent in the week ended Sept. 6.

The net figure is the difference between the percentage of investors long on notes and the percentage of those who are short. A long position is a bet that prices will increase, while a short is a bet that prices will fall.

The difference in yield between 10- and 2-year notes fell 0.05 percentage point to 2.18 percentage points. The spread widened yesterday to 2.27 percentage points, the widest since Aug. 10, when the Fed said it would keep its bond holdings level by resuming the purchase of U.S. debt to support a recovery it described as weaker than earlier anticipated.

Goldman Sachs’s View

A new round of monetary easing by the Fed would probably provide a mild boost to the economy, said Jan Hatzius, chief economist at Goldman Sachs Group Inc. in New York.

“We’re talking about a moderate impact,” Hatzius said today in a conference call, discussing the effect should the Fed stage a new round of bond purchases, a policy known as quantitative easing.

A total of $1 trillion in bond purchases would improve stability in financial markets and increase real gross domestic product by 0.3 to 0.4 percentage point, according to Hatzius.

Economic growth slowed to a 1.6 percent annual pace in April through June, from 3.7 percent in the first quarter, the Commerce Department reported Aug. 27.

The central bank’s next purchases of Treasuries will be tomorrow, targeting notes due from September 2014 to August 2016, according to the New York Fed’s website. Policy makers are seeking to keep holdings in the System Open Market Account, or SOMA, at about $2.054 trillion by using the proceeds of principal payments from its agency mortgage-backed securities and agency debt.

‘Stabilizing the Market’

“The asset purchases now are stabilizing the market,” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities Inc. in New York.

Gold futures for December delivery rose to a record $1,268 an ounce as investors sought refuge. Crude oil for October delivery gained 0.5 percent to $77.61 a barrel. The Standard & Poor’s 500 Index was up 0.2 percent.

Treasuries rose earlier as the ZEW Center for European Economic Research in Mannheim said its index of German investor confidence dropped for a fifth month in September to minus 4.3, the lowest level since February 2009.

Retail sales in the U.S. advanced 0.4 percent in August after a downwardly revised 0.3 percent increase in the previous month, the Commerce Department reported in Washington. The median forecast of 76 economists in a Bloomberg News survey was for a 0.3 percent increase.

“They were better than expected but not really enough to drive the economy forward in a big way,” Kevin Giddis, head of fixed-income sales, trading and research at brokerage firm Morgan Keegan Inc. in Memphis, Tennessee, wrote in a note to clients. “This is likely the best it’s going to get for the next 10 to 12 months.”

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Treasuries rose, pushing the 10-year note yield down the most in a week, on speculation the Federal Reserve will announce more purchases of the securities this year to keep borrowing costs low and support the recovery.U.S. debt also advanced as a plunge in the dollar to a...
Tuesday, 14 September 2010 02:59 PM
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