Treasury Yields Fall as Fed Cuts, Pledges to Buy Long-Term Debt
By Daniel Kruger and Dakin Campbell
Dec. 20 (Bloomberg) ** U.S. government debt gained for a seventh week as the Federal Reserve cut its benchmark rate to as low as zero and said it would buy long-term debt, possibly including Treasuries, to lower borrowing costs and spur growth.
Yields dropped to record lows for all maturities, and rates on bills hovered near or below zero as investors sacrificed returns to ensure the safety of their principal amid the worst financial crisis since the Great Depression.
Treasuries returned 14.7 percent this year, their best performance in 13 years.
“Much of the rally is driven by fear, the Fed, and year- end factors,” said Mark MacQueen, a partner and money manager at Austin, Texas-based Sage Advisory, which oversees $6 billion. “There is a lot of liquidity around, and the only thing it’s doing is going into Treasuries.”
The yield on the benchmark 10-year note fell 44 basis points on the week, or 0.44 percentage point, to 2.13 percent, according to BGCantor Market Data. It touched 2.0352 percent, the lowest on record for data going back to 1953. The price of the 3.75 percent security due in November 2018 gained 4 1/8, or $41.25 per $1,000 face amount, to 114 3/8.
Yields on 30-year bonds tumbled 49 basis points to 2.55 percent after touching 2.5090 percent, the lowest since regular sales of the security began in 1977.
Treasury Returns
Two-year note yields dropped one basis point to 0.76 percent after touching 0.6044 percent, the lowest since regular sales began in 1975. Rates on three-month bills decreased two basis points to minus 0.01 percent after touching a record low of minus 0.05 percent. One-month bill rates increased three basis points to 0.04 percent after reaching a record low of minus 0.04 percent.
Treasuries gained this week as the economy moved into its longest recession in a quarter-century. U.S. government debt has returned 9.8 percent since the end of October, which would be the best two-month performance since October and November 1981, when it returned 13.34 percent, according to Merrill Lynch & Co.’s U.S. Treasury Master Index.
During the 1981 period, the 10-year yield plunged to 13.13 percent by the end of November from the all-time high of 15.84 percent it touched on Sept. 30 as the Fed tried to quell inflation with high interest rates.
The Fed on Dec. 16 dropped its 1 percent target rate for overnight loans between banks to a range of zero to 0.25 percent. That narrowed the difference between the yield on the two-year note and the target rate to about 0.48 percentage point, near its average of 0.399 percentage point over the past decade. The central bank reiterated its commitment to spend up to $600 billion to buy so-called agency debt from government- sponsored entities such as Fannie Mae and Freddie Mac, and mortgage debt.
‘Don’t Fight the Fed’
“One of the main themes we’re talking about is ‘don’t fight the Fed,’” said Michael Pond, an interest-rate strategist in New York at Barclays Capital Inc., one of the 17 primary dealers that trade with the Fed. “They will be buying mortgages; they’ve already started buying agencies. Regardless of what asset class they’re buying, they’re buying fixed-income duration and that should push long Treasury rates.”
Duration is a measure of price sensitivity to interest-rate changes expressed as a number of years. Adding duration to a portfolio is a bet that interest rates will fall.
The 30-year Treasury bond has the most duration among fixed-income securities paying principal and interest, driving demand for the security when investors expect rates to fall.
Treasuries pared gains yesterday as General Motors Corp. and Chrysler LLC received $13.4 billion in short-term loans and investors bet the week’s gains in government securities were exaggerated.
Automaker Bailout
General Motors and Chrysler will get government loans to keep operating in exchange for a restructuring under a rescue plan announced yesterday by President George W. Bush.
The money will be drawn from the Troubled Asset Relief Program for financial firms, and the automakers will get an additional $4 billion from the fund in February, according to the administration. The money will allow GM and Chrysler to keep operating until March.
The Treasury said it will sell $66 billion in notes next week, a record $38 billion of two-year notes on Dec. 22 and an all-time high $28 billion of five-year securities on Dec. 23.
U.S. government debt’s 14.7 percent return in 2008 is the most in a year since 1995, when it provided 18.5 percent, according to Merrill Lynch’s Treasury Master index. Corporate debt fell 12.4 percent for the year, according to another Merrill index. The Standard & Poor’s 500 Index of equities has plunged nearly 40 percent in 2008, poised for its biggest yearly drop since 1931.
The difference in yield, or spread, between two- and 10- year notes narrowed to 1.38 percentage points, the smallest since September, from 1.94 percentage points at the end of last month and a five-year high of 2.62 points reached on Nov. 13.
To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; Dakin Campbell in New York at dcampbell27@bloomberg.net.
