Treasurys gain; Fed seen buying bonds soon
Fed buys $2 billion in short-term debt as part of previous program
By Deborah Levine, MarketWatch
NEW YORK (MarketWatch) — Treasury prices rose for a third day on Wednesday, pushing 10-year note yields down to the lowest in three weeks, as investors around the world concurred that the Federal Reserve will soon engage in an asset-buying program.
The policy statement issued late Tuesday by the Federal Open Market Committee was seen as increasing the likelihood that the U.S. central bank will embark on what’s often called quantitative easing, or QE in financial circles.
Yields on 10-year notes (U.S.:UST10Y) fell to 2.50% earlier, the lowest level in three weeks, as stocks fell to their lows of the session with investors worried about the implications of the Fed’s concern over both deflation and economic growth.
The benchmark’s yield lately declined 2 basis points to 2.55%. Bond prices move inversely to their yields and a basis point is 0.01%.
In late August, 10-year yields dropped to 2.42%, the lowest since January 2009.
Yields on 30-year bonds (U.S.:UST30Y) declined 4 basis points to 3.75%.
Yields on 2-year notes (U.S.:UST2YR) , more sensitive to Fed rate expectations, fell to a new all-time low of 0.39% in early trading. But they recovered and recently stood at 0.43%, up 1 basis point on the day.
“It is clear to us that the Fed is setting into play the framework to act on full-blown QE at the November meeting” of the FOMC if inflation readings come in lower than expected, said Tom di Galoma, head of U.S. rates trading at Guggenheim Partners.
The Fed said late Tuesday that it’s prepared to take more extraordinary measures to pump up the weak economy if growth doesn’t improve. Officials also expressed more concerns about the prospect of deflation. Read more on Fed decision.
Bonds rallied in response, with 10-year yields declining by the most since mid-August. Read about Tuesday’s bond rally.
Markets are still reacting to the Fed's latest hints about quantitative easing, with the dollar falling, Treasurys rising and gold nearing $1,300.
Longer-dated securities are expected to be the more favored sector by the Fed when it starts buying assets, because more individual and corporate borrowing costs are based on long-term yields. That’s also the sector that the Fed bought more of when it was purchasing bonds during the financial crisis.
Such expectations will tend to help long-term bonds rally more and narrow the gap in yields with shorter-dated debt.
“We remain ultimately bulls and think 10-year yields will visit the 2% to 2.25% area,” said bond strategists at CRT Capital Group. “To get QE, we’ll need soft data when soft data alone would be cause for lower rates.”
A thin Wednesday calendar for U.S. economic data featured the government reporting that home prices declined to the lowest levels in six years during July. Read more about home prices.
Also, as part of a previously announced plan to recycle cash from its maturing mortgage-related debt back into the market, the Federal Reserve Bank of New York purchased $2.07 billion in Treasury debt maturing from 2013 to 2014, in line with analysts’ expectations. Dealers offered to sell the Fed $20.486 billion in debt. See Fed buyback results.