Treasurys Rally, Long-End Races Higher On Mtge-Related Buying
11/26 01:40 PM
NEW YORK (Dow Jones)--Longer-maturity Treasurys outperformed again Wednesday on hedging-related buying that came in thin, bouncy trading ahead of the Thanksgiving holiday.
The bond market closes early at 2 p.m. EST (1900 GMT) on Wednesday and is shuttered on Thursday for Thanksgiving.
Buying Wednesday sparked the 10-year yield to hit a historic low of 2.98% and the price of the long bond to rise at one point by more than two points. Yields move inversely to price.
The rally added to big long-end gains Tuesday spurred by the government's pledge to dedicate up to $800 billion to support consumer lending and mortgage- backed markets.
Meantime Wednesday, the slew of economic reports squeezed in before the market's early close were almost all downbeat, helping the bond market to rally. Durable goods orders plunged by more than double the forecast, personal spending fell, new home sales slipped and consumer confidence weakened again.
Shorter-term Treasurys were lifted as well, though less so than their longer- term peers. The two-year yield dipped as low as 1.07% but was up just 3/32 at 1.11% in afternoon trade.
Wednesday's rally was a "combination of convexity hedging, the recession sinking in, and the continued view of Treasurys as the safe haven," said Jerry Webman, chief economist and director of fixed income at OppenheimerFunds in New York.
Treasurys' benchmark yield curve, the gap between the two- and 10-year yields, also continued to flatten as longer-term Treasurys remained more in favor. The curve was at plus 190 basis points in recent trading compared with plus 194 on Tuesday.
Tuesday, the Fed announcement of its new programs to help the mortgage market and consumers set off strong demand for agency bonds and agency mortgage-backed securities, causing MBS dealers to remove hedges against interest rate swings by buying long-term U.S. government debt. News of the new rescue programs also drove mortgage servicers and portfolio managers to buy longer-dated Treasurys in order to hedge against the risk of falling interest rates after the rally in the MBS market.
Those hedging needs continued into Wednesday's session.
The latest government rescue effort, the Term Asset-Backed Lending Facility, or TALF, will start next week, with the Fed buying $100 billion of mortgage finance company debt. It has also pledged to buy up to $500 billion of securities guaranteed by Fannie Mae (FNM:$0.7337,$0.2637,56.11%) , Freddie Mac (FRE:$0.7932,$0.2632,49.66%) and Ginnie Mae, to help support the mortgage- and student loans markets. The Treasury will also help backstop up to $200 billion of lending to investors in high-grade debt such as student loans, credit-card and auto loans, and small business loans.
The programs are key as they mark a turning point in policy makers' approach - moving from simply providing liquidity to outright buying of debt. For the Treasury market, the programs are a crucial new force that will drive prices.
The programs create "a structural demand that changes the fixed-income market, " said George Goncalves, chief Treasury, TIPS and agency strategist at Morgan Stanley (MS:$14.21,00$-0.06,00-0.42%) in New York.
In the near-term, longer-term Treasurys and the belly of the curve should outperform as hedging-related buying continues to make its mark, Goncalves said, at least until quarter-end.
Longer-term though, going into 2009, Treasurys could be headed for darker days if Fed programs show signs of working and interest in riskier assets improves.
Meanwhile Wednesday, there were more improvements in money markets following the Fed and Treasury announcement, even though Treasury bills were surging once again, with the three-month bond equivalent yield pushing back toward zero late afternoon.
Still though, interbank lending rates continued to improve. The key three- month U.S. dollar London interbank offered rate fell to 2.18125% from Tuesday's 2.19625%, while the one-month drops to 1.43125% from 1.43625%.
-By Deborah Lynn Blumberg, Dow Jones Newswires; 201-938-2018; deborah.blumberg@dowjones.com
(Min Zeng and Emily Barrett contributed to this report.)
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(END) Dow Jones Newswires
11-26-081340ET
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