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Treasury Yields Drop to Record Lows as Bernanke Cites Buybacks
http://www.bloomberg.com/apps/news?pid=20602007&sid=awxh8.ryvSjg&refer=govt_bonds#
By Dakin Campbell and Daniel Kruger
Dec. 1 (Bloomberg) -- Treasuries rose, pushing yields to record lows, as Federal Reserve Chairman
Ben S. Bernanke said the central bank may purchase Treasuries and target long-term interest rates to combat the deepening recession.
Bonds rallied for a fourth day, sending yields on two-, 10- and 30-year debt to the lowest since the Treasury began regular sales of the securities. Bernanke said he has “obviously limited” room to lower interest rates further and may use less conventional policies, such as buying Treasury securities. The panel of economists charged with dating business cycles said the U.S. entered a recession in December 2007.
“The thing that was significant is the reminder that the FOMC can buy long Treasuries,” said
Jamie Jackson, who oversees government and agency debt trading at Minneapolis-based RiverSource Investments, which manages $90 billion. “Bernanke explicitly said they still had more room to go in easing policy.”
The 10-year note yield fell 25 basis points, or 0.25 percentage point, to 2.67 percent at 2:31 p.m. in New York, according to BGCantor Market Data. The yield was the lowest since Federal Reserve’s daily records started in 1962 and the least since 1955 as measured on a monthly basis. The 3.75 percent security due in November 2018 rose 2 8/32, or $22.50 per $1,000 face amount, to 109 11/32. The
two-year note declined 10 basis points to a record 0.88 percent, after falling through 1 percent for the first time on Nov. 20.
The 30-year bond yield dropped 21 basis points to a record 3.22 percent.
Flight to Safety
Investors have flocked to Treasuries, pushing their return in November to 5.4 percent, the biggest monthly gain since 1981, Merrill Lynch & Co. index data show. U.S. government debt returned 10.1 percent this year, the most since 11.6 percent in all of 2002, the indexes show.
Tumbling equity prices also prompted investors to seek the safety of Treasuries. The
Standard & Poor’s 500 Index plunged 5.6 percent, while the MSCI World Index lost 5.2 percent.
The Institute for Supply Management’s factory index declined in November to 36.2, the lowest level since 1982, from 38.9 the previous month, the Tempe, Arizona-based group said. A reading of 50 is the dividing line between expansion and contraction. The ISM index of prices paid dropped to 25.5, the lowest level in six decades, from 37.
Similar manufacturing gauges for China, the U.K., the euro area and Russia all dropped to record lows.
U.S. Recession
The U.S. economy entered a recession in December 2007, the National Bureau of Economic Research said today. The U.S. was last in a recession from March through November 2001, according to the private, nonprofit group of economists. The NBER is based in Cambridge, Massachusetts.
The
spread between yields on two- and 10-year notes narrowed to 1.80 percentage points, from 1.94 percentage points on Nov. 28, as traders continued to purchase longer-maturity Treasuries after the Fed said last week it would buy $500 billion of mortgage-related debt securities. The gap was 2.62 percentage points Nov. 13, the widest in more than five years.
Traders speculate the Fed’s purchases may drive mortgage rates lower, causing homeowners to refinance and reducing the average maturity, or duration, of mortgage bonds. A sudden drop or rise in duration may cause losses for investors, forcing them to buy Treasuries as a hedge and to replace duration. The yield on Fannie Mae’s 30-year current coupon mortgage securities fell 12 basis points to 4.71 percent, from 4.83 percent Nov. 28.
Convexity Trades
“The ball got rolling last week with the convexity trades and month-end extensions,” said
Chris Ahrens, an interest-rate strategist at UBS Securities LLC in Greenwich, Connecticut, one of 17 primary dealers that trade with the Fed. “The trade has fed upon itself with the continued weak economic information that we saw today.”
Convexity is a measure of the rate of change of a bond’s duration because of interest-rate movement.
Futures on the Chicago Board of Trade show 64 percent odds the Fed will lower its 1 percent target rate for overnight bank lending by a half-percentage point on Dec. 16, and a 36 percent chance of a three-quarter-percentage point cut.
Yields will decline in 2009 as the U.S. central bank lowers its 1 percent target rate for overnight loans between banks to zero, JPMorgan analysts
Terry Belton and
Srini Ramaswamy in New York wrote in a report Nov. 28. Ten-year yields will decline to 2 percent by the middle of next year and two-year rates will slide to 0.6 percent, they wrote.
President-elect
Barack Obama, who takes office in January, will inherit an economy that will contract 2.05 percent in the last quarter of 2008, a Bloomberg survey shows. The decline would be the biggest since 1990.
Treasury ‘Bubble’
Demand for Treasuries has reached the ‘bubble’’ phase seen among technology stocks in 2000 and real estate six years later, according to
David Rosenberg, chief North American economist at Merrill Lynch & Co.
“The 10-year note yield is now firmly below the 3 percent threshold and this next leg down in yield will undoubtedly represent the classic mania-turn-to-bubble phase that quite plausibly sees an overshoot to or even through the April 1954 lows of 2.3 percent,” New York-based Rosenberg said in a research note today before Bernanke’s speech.
Treasury Inflation Protected Securities show investors see little chance of inflation as the economy slows. The gap between rates on 10-year
TIPS and conventional notes was 34 basis points, near the minus 8 basis points touched on Nov. 20, a level not seen since the introduction of inflation-indexed securities in 1997. The difference narrowed from this year’s high of 268 basis points in March.
Inflation Expectations
“Inflation expectations are continuing to drop,” said
Jay Mueller, who manages about $3 billion of bonds at Wells Fargo Capital Management in Milwaukee. “OPEC didn’t get anywhere in cutting oil output, crude futures are down today and the ISM prices-paid index was the lowest print in that series in almost 60 years.”
Crude oil fell below $50 a barrel after the Organization of Petroleum Exporting Countries deferred a decision to reduce output until its next meeting on Dec. 17.
Yields on government debt dropped so low fund managers have little chance of offering anything but subpar returns in 2009. BB&T Asset Management, BlackRock Inc., T. Rowe Price Group Inc. and Sage Advisory Services Ltd. are looking to invest in corporate debt they considered toxic just a month ago. Treasury funds are receiving permission to buy debt of Morgan Stanley, JPMorgan Chase & Co. and Goldman Sachs Group Inc. after the Federal Deposit Insurance Corp. completed plans on Nov. 21 to guarantee their debt.
Once-Toxic Debt
Treasuries “are yielding next to nothing,” said
Robert Millikan, who manages $5 billion at BB&T in Raleigh, North Carolina, including the $51 million BB&T Short U.S. Government Fund.
An indicator used by some traders to predict changes in the direction of prices showed 10-year notes were poised to fall after reaching the most overbought levels in at least 11 months. The 14-day relative strength index for 10-year note futures contracts due in March rose to 77.5 today from 64.3 on Nov. 24. A reading above 70 indicates the notes are overbought, while one below 30 indicates oversold conditions.
