Updated Wednesday, October 22, 2014 as of 11:06 PM ET

Treasury 10-Year Yields Trade at Almost 2-Week Low on Bernanke Stimulus

Bloomberg -- Treasury 10-year note yields traded at almost a two-week low after Federal Reserve Chairman Ben S. Bernanke assured lawmakers he is prepared to maintain the central bank’s stimulus program if growth misses expectations.

Benchmark yields pared losses after fewer Americans than forecast filed applications for unemployment benefits. Bernanke said yesterday the Fed’s bond purchases could be reduced more quickly or expanded as economic conditions warrant. He testifies before the Senate today. The underperformance of U.S. debt may be over, according to BlackRock International Limited. The Treasury is scheduled to sell inflation-protected securities maturing in 2023 today.

“They mentioned tapering just to prick the bond bubble -- we’re data dependent,” said Charles Comiskey, head of Treasury trading at Bank of Nova Scotia in New York, one of 21 primary dealers that trade with the Fed. “We’re on course for a September tapering, but if the data is weak, obviously they’ll push that back. Every piece of data is going to be scrutinized.”

Treasury 10-year yields were little changed at 2.49 percent as of 8:46 a.m. New York time after reaching 2.46 percent yesterday, the lowest since July 3. The rate declined nine basis points in the previous three days. The 1.75 percent note due in May 2023 traded at 93 19/32.

“The range is 2.3 percent to 2.6 percent,” said Comiskey.

YIELDS FALL

Treasury 10-year yields fell seven of the previous eight days, erasing their 24-basis point advance on July 5 when a report showed U.S. employers added more jobs than expected in June.

The Fed could keep buying bonds for longer if “financial conditions -- which have tightened recently -- were judged to be insufficiently accommodative to allow us to attain our mandated objectives,” Bernanke said yesterday in testimony to the House Financial Services Committee.

U.S. bonds may have stopped underperforming their peers, according to Benjamin Brodsky, global head of fixed-income asset allocation and emerging markets at BlackRock in London.

The yield difference, or spread, of Treasury 10-year notes over their German equivalents was at 96 basis points today after touching 105 basis points on July 15, the most since 2006.

“The underperformance of U.S. rates may have ended,” Brodsky said at a briefing in London. “We still believe that they are expensive, and the Fed will want to keep it expensive.”

INFLATION EXPECTATIONS

The difference in yield between 30-year notes and similar- maturity Treasury Inflation Protected Securities, a measure of trader expectations for inflation over the life of the debt called the break-even rate, was at 2.28 percentage points, set for the highest close since June 4. That compares with an average of 2.42 percentage points in the past year.

The Treasury is scheduled to sell $15 billion of 10-year TIPS. It last sold the debt on May 23 at a yield of minus 0.225 percent when investors bid for 2.52 times the amount of securities on offer.

At their most recent meeting last month, members of the Federal Open Market Committee decided to maintain purchases of Treasuries and mortgage-backed securities at a rate of $85 billion a month as part of a policy known as quantitative easing, and kept the central bank’s benchmark rate at between zero and 0.25 percent.

As of yesterday, investors saw a 40 percent chance policy makers will raise the federal funds rate to 0.5 percent or higher by the end of 2014. That compared with 53 percent odds on July 10, according to data compiled by Bloomberg.

JOBLESS CLAIMS

“The message from Bernanke was clearly dovish,” said Patrick Jacq, a senior rates strategist at BNP Paribas SA in Paris. “The Fed was concerned by the sharp rise in yields. It makes sense to see a further limited rally. Yields can fall to the 2.40 percent area.”

Jobless claims dropped by 24,000 to 334,000 in the week ended July 13, the fewest since early May, from a revised 358,000 the prior period, Labor Department figures showed today in Washington. The median forecast of 49 economists surveyed by Bloomberg projected 345,000. The recent swings reflect the difficulty in adjusting the data for the timing of annual retooling shutdowns at automakers, a spokesman said as the figures were released to the press.

NOTE AUCTIONS

A separate report will show the Fed Bank of Philadelphia’s general economic index slowed to 8 this month from a two-year high of 12.5 in June. Readings greater than zero signal expansion in the area, which covers eastern Pennsylvania, southern New Jersey and Delaware.

The Treasury Department is due to announce today the size of two-, five- and seven-year auctions scheduled for sale over three days starting July 23. It will offer $35 billion of two- year debt, $35 billion of five-year notes and $29 billion of seven-year securities, according to Stone & McCarthy Research Associates, an economic advisory company in Princeton, New Jersey. The government sells this combination of debt every month.

Treasury trading volume at ICAP Plc, the largest inter- dealer broker of U.S. government debt, rose 42 percent yesterday to $364 billion, the most since July 5. The 2013 average is $320.4 billion. Volatility in Treasuries as measured by the Merrill Lynch Option Volatility Estimate MOVE Index was 81.92 yesterday, the lowest level in a month.

 

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