Ten-Year Treasuries Have Biggest Three-Week Gain in 15 Years
Bloomberg News
Friday, May 23, 2003
bostonherald.com
U.S. 10-year Treasuries had their biggest three-week gain in 15 years after Federal Reserve officials signaled the central bank may buy longer-maturity debt to halt a drop in the inflation rate.
Yields on 10-year notes reached a 45-year low after Fed Chairman Alan Greenspan and Governor Mark Olson said the central bank has the ability to bring down long-term rates. Should the Fed's target for overnight loans between banks drop to zero from 1.25 percent today, the bank could buy debt maturing in 10 or more years, Olson said yesterday.
``Fed buying is another one of those bullets of monetary policy they have in their holster,'' said Sam Paddison, who runs $110 billion at Evergreen Asset Management in Philadelphia. While he doesn't see such action in the near term, ``it's a tool they can use,'' Paddison said.
The 3 5/8 percent note maturing in May 2013 rose more than 5/8 in price from last Friday, or $6.25 per $1,000 face amount, to 102 13/32 at 4:30 p.m. in New York, according to Cantor, Fitzgerald LP. Its yield fell 8 basis points to 3.34 percent, and reached 3.29 percent, the lowest since 1958 for a Treasury due in 10 years. On the day, the note trimmed its weekly advance, falling 3/16 as the Standard & Poor's 500 Index of stocks gained for a third day, analysts said. The note's yield rose 3 basis points from yesterday. A basis point is 0.01 percentage point.
Ten-year yields have dropped 59 basis points since May 2, the first three-week slide since December and the biggest since January 1988, three months after the stock market crash of 1987. Two-year yields touched a 53-year low this week as some traders bet the Fed might cut its rate target to spur growth.
The Bond Market Association, an industry trade group, recommended U.S. bond markets close one hour early today at 2 p.m. and remain shut Monday in observance of Memorial Day.
Lower Consumer Rates
The rally in Treasuries benefits consumers by lowering borrowing costs. The 30-year mortgage rate fell to a record 5.34 percent this week, according to home loan financier Freddie Mac. Ten-year note yields may fall to 3.15 percent in the next month before rising to 3.50 percent later this year, said Paddison.
Consumers may also get a boost after the U.S. Congress today passed a $350 billion tax cut and spending plan.
Yields on 10-year notes extended their slide this week after Greenspan, echoing comments in a May 6 Fed statement, called a ``substantial fall'' in inflation ``unwelcome.'' The Fed has ``the capability, should that be necessary, of moving long-term rates down and expanding'' the money supply, he said on May 21.
No such strategy has been attempted in the U.S. since the 1960s, when the Kennedy administration pressured the Fed to buy fewer short-term notes and more long-term debt.
`Low' Deflation Chance
Olson said in a speech in Minnesota that the possibility of deflation in the U.S. ``is very low,'' and ``if necessary, what you do is focus farther out on the yield curve to bring down interest rates for the long term.'' The yield curve is a chart of Treasuries of different maturities.
The remarks caused 10-year notes to gain more than two-year notes, shrinking the gap between yields on the two maturities to 1.99 percentage points, the smallest since October. In trader lingo, that shrinking is called a flattening of the yield curve.
Greenspan ``caused some curve flattening by highlighting'' that the Fed may buy longer-dated debt, said Carol Stone, deputy chief economist at Nomura Securities International Inc., one of the 22 firms that trade directly with the Fed. She's skeptical the Fed will actually adopt that strategy, as they have avoided ``anything that smacks of manipulation of the yield curve.''
Turnover in Treasuries surged in the past few weeks. There were $560 billion of transactions in U.S. government debt in the week ended May 14, up 21 percent from the week before and 41 percent from two weeks earlier, according to Fed statistics.
The gap between yields on 10- and 30-year Treasuries, now about 90 basis points, may shrink to 50 in coming months as investors look to longer-dated debt for higher yields, said Scott Colbert, a fixed-income portfolio manager who helps oversee $6.5 billion at Commerce Bank NA in St. Louis.
Foreign Central Banks
The 1 5/8 percent note maturing in April 2005 fell 1/32 to 100 17/32 as its yield rose 3 basis points to 1.35 percent. The yield reached 1.25 percent on May 20, the lowest since 1950 for a security with two years left to maturity.
Asian central banks may have been buying Treasuries in recent days as they sold their currencies for dollars to bolster exports, some analysts said.
``I wouldn't be surprised if we have seen extensive central bank buying of the Treasury market, certainly looking for some yield and also on the expectation the Fed itself might be a buyer at some stage,'' Stephen Halmarick, a bond and currency strategist at Citigroup Global Markets in Sydney, told Bloomberg Television. ``The chance of a Fed rate cut at the June meeting is close to 50- 50.''
The increase in U.S. government and agency securities held by the Fed for foreign institutions May 21 from a week earlier rose $23.185 billion to $924.4 billion, the largest ``in recent years,'' said Linda Ricci, a New York Fed spokeswoman.
Rate Expectations
Traders have boosted expectations for a rate cut when policy makers meet on June 25-26. Federal funds futures show traders anticipate a 74 percent chance of a quarter-point cut in the target, based on the 1.065 percent closing yield on the July contract. Though the odds were as high as 100 percent on Tuesday, they are still up from 68 percent a week ago. The futures contracts gauge the average overnight rate for a particular month.
``It's a growing probability if not a certainty that the Fed will'' cut rates in coming months, said Commerce Bank's Colbert.
Traders drove up bond prices yesterday as first-time claims for jobless benefits held for a 14th week above 400,000, a level some economists consider a sign of a weak labor market.
The European Central Bank this week moved closer to an interest-rate cut as the euro's 28 percent rise against the dollar in the past year diminishes demand for the region's products and inflation slows, remarks from policy makers suggest. |
