Treasury Two-Year Yield Near Record Low as Federal Reserve May Cut Outlook
By Wes Goodman - Sep 20, 2010 7:51 AM GMT+0200 Mon Sep 20 05:51:36 GMT 2010
Treasury two-year yields were two basis points away from a record low on speculation the Federal Reserve will scale back its outlook for economic growth at a policy meeting tomorrow.
Officials will take additional steps to keep borrowing costs low at a subsequent meeting, according to
Mohamed A. El- Erian, chief executive officer at Pacific Investment Management Co., which runs the world’s biggest bond fund. The Fed is
scheduled to buy notes maturing from September 2016 to August 2020 today as part of its effort to sustain the expansion.
“I’m bearish on the economy and quite bullish on Treasuries,” said Chungkeun Oh, a fixed-income trader in Seoul at Industrial Bank of Korea, South Korea’s largest lender to small- and medium-sized companies. “The Fed’s intention is to make long-term Treasury yields go lower.” Oh said he bought Treasuries last week.
Two-year notes
yielded 0.47 percent as of 6:47 a.m. in London, according to BGCantor Market Data, versus the record low of 0.45 percent set Aug. 24. The 0.375 percent security due in August 2012 traded at 99 26/32. Ten-year yields were little changed at 2.74 percent.
Slower than-expected economic growth has fueled speculation the Fed will expand its program of Treasury purchases or announce other measures as it tries to keep benchmark interest rates low.
The Fed will introduce extra measures “but probably not at this meeting,” El-Erian wrote in an
opinion piece on ft.com’s ftalphaville website. “It should and, I suspect, will,” trim its growth projections, said El-Erian, who is based in Newport Beach, California.
Buying Debt
At the central bank’s most recent meeting on Aug. 10, the Fed said it would reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in longer- maturity Treasuries.
The possibility of a sub-par expansion poses a dilemma for Fed Chairman
Ben S. Bernanke. While the economy isn’t so weak as to need more stimulus, it may not be strong enough to keep
unemployment from increasing.
Twenty-seven of 58 economists surveyed by Bloomberg this month see growth in 2011 below the 2.5 percent to 2.8 percent pace Fed policy makers peg as the long-term trend. Twenty-eight see the jobless rate rising above last month’s 9.6 percent sometime in the next nine months.
TIPS
The
difference between yields on 10-year
notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, was 1.78 percentage points, less than the five-year average of 2.11 percentage points.
Signs of growth in the economy are making
Roger Bridges at Tyndall Investment Management Ltd. bet against Treasuries.
“Yields are unjustifiable here,” said Bridges, who oversees the equivalent of $14.9 billion in Sydney at the unit of Australia’s largest insurer. “There are a lot of positives in the U.S. economy. People are more pessimistic than they should be.”
Home sales probably increased in August, a sign the U.S. real estate market is stabilizing, economists said before reports this week.
Less Bearish
Investors in a weekly survey by Ried Thunberg ICAP, a unit of the world’s largest inter-dealer broker, were less bearish on Treasuries. Ried’s index on the outlook for U.S. debt through June rose to 44 for the seven days ended Sept. 17 from 43 the week before. A figure less than 50 indicates that investors expect prices to fall.
Economic woes spread to Europe last week, where Irish bonds led declines by the debt of so-called peripheral euro-region countries on concern the nation’s banks will require further government aid. Now Germany’s biggest bond dealers say the worst is over.
Yields on government bonds of Greece, Spain, Ireland and Portugal will fall to within 2.2 percentage points of benchmark German bunds on average within the next two years from 4.61 percentage points last week, according to a Bloomberg survey of 15 banks that trade directly with Germany’s debt agency. HSBC Holdings Plc, Europe’s largest bank by market value, Goldman Sachs Group Inc. and Societe Generale SA advise buying securities sold by Greece.
Bond dealers are confident austerity measures will be enough to damp speculation the 16-nation currency union is in jeopardy of falling apart. Gross domestic product in the region will likely increase 1.7 percent this year instead of the 0.9 percent projected at the depth of the crisis in May, the European Commission said Sept. 13. Banks were given more time to raise capital levels to meet new regulations, reducing the likelihood they will need additional government aid.
“All the policy backstops have put a floor under the downside risks for peripheral euro-region bonds,” said
Michael Vaknin, a senior fixed-income strategist in London at Goldman Sachs. “Spreads are near their records, but the EU and International Monetary Fund have pledged their support and opportunities are starting to emerge.”
(Bloomberg)
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