Treasuries Fall as Fed Says U.S. Debt Buys to End in October
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By Susanne Walker
Aug. 12 (Bloomberg) -- Treasuries fell for the first time in three days after the Federal Reserve said it will “gradually slow” its purchases of government securities and anticipated that the full amount will be bought by the end of October.
Yields on 10-year notes rose as policy makers left their target interest rate in a range of zero to 0.25 percent. The Fed said economic activity is “leveling out,” and conditions mean the rate will stay “exceptionally low” for an “extended period.” The Treasury’s sale of a record $23 billion of 10-year notes drew weaker-than-forecast demand.
“They are going to slow it down so it’s more negative than positive,” said Mustafa Chowdhury, head of U.S. interest-rates research in New York at Deutsche Bank Securities Inc., one of the 18 primary dealers that trade with the central banks. “There are more worries about the supply and the effect of it on the market. That’s still a big question mark.”
The yield on the benchmark 10-year note rose four basis points, or 0.04 percentage point, to 3.71 percent at 2.45 p.m. in New York, according to BGCantor Market Data.
“To promote a smooth transition in markets as these purchases of Treasury securities are completed, the committee has decided to gradually slow the pace of these transactions and anticipates that the full amount will be purchased by the end of October,” the Federal Open Market Committee said in a statement after a two-day meeting in Washington. The buying was previously scheduled to end in September.
Target Rate
The Fed announced on March 18 it would buy up to $300 billion of Treasuries over six months in an effort to cap borrowing costs and stimulate the economy. It has since purchased $252.761 billion in U.S. debt and more than doubled the assets on its balance sheet during the past year to $2.1 trillion, expanding bank reserves and beginning lending programs to bolster the financial system.
Chairman Ben S. Bernanke has emphasized that the central bank can successfully take back more than $1 trillion it pumped into the U.S. banking system to pull the economy out of recession without stoking inflation.
“Short-term I think it’s bad for the Treasury market because people think the Fed is not going to buy more Treasury paper,” said Michael Cheah, who manages $2 billion in bonds at SunAmerica Asset Management in Jersey City, New Jersey. “Longer-term it’s good because people realize that the Federal Reserve is not going to contribute to monetization and hyper- inflation.”
The central bank said in its statement that “businesses are still cutting back on fixed investment and staffing, but are making progress in bringing inventory stocks into better alignment with sales.”
Pale in Comparison
The Fed’s purchases pale in comparison to the record amounts of Treasuries the government is selling to finance economic stimulus programs and service record deficits.
President Barack Obama has pushed the nation’s marketable debt to an unprecedented $6.78 trillion in an effort to spur economic growth and support the financial system. The budget shortfall will reach $1.85 trillion in the year ending Sept. 30, equivalent to 13 percent of the nation’s economy, according to the nonpartisan Congressional Budget Office.
Goldman Sachs Group Inc., one of 18 primary dealers that trade with the central bank, predicts the U.S. will sell about $2.9 trillion of debt in the two years ending September 2010, a reduction in its previous estimate for Treasury auctions by 28 percent which it attributed to the improving economy.
The shortfall so far for the fiscal year that ends Sept. 30 totaled $1.27 trillion compared with a $389 billion year-to date gap in 2008, the Treasury said today in Washington. The excess of spending over revenue for July climbed to $180.7 billion compared with a $102.8 billion gap in July 2008 as the government spent more than in any month in U.S. history.
Ten-Year Auction
Tax receipts are sliding and spending is surging even as some economists say the recession may have ended.
Treasuries fell as a record $23 billion auction of 10-year notes drew less-than-forecast demand with investors reluctant to buy securities before the conclusion of today’s Federal Reserve policy meeting.
The notes drew a yield of 3.734 percent, compared with a forecast of 3.708 percent in a Bloomberg News survey of seven of the Federal Reserve’s primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with amount of securities offered, was 2.49, compared with an average of 2.48 at the last 10 auctions.
Indirect bidders, a class of investors that includes foreign central banks, bought 45.7 percent of the notes at today’s auction, the most since November 2005.
“It’s a record amount,” Andrew Richman, who oversees $10 billion in fixed-income assets as a strategist in West Palm Beach, Florida, for SunTrust Bank’s personal-asset management division, said before the auction. “There are more signs of a recovery in place. Risk premium is back into people’s portfolios. That makes it tough for the auctions.”
Credit Markets
The government plans to sell $15 billion of 30-year bonds tomorrow. It sold a record $37 billion in three-year notes yesterday. Sales of 3-, 10 and 30-year securities have become monthly, raising $65 billion in July.
The Fed program hasn’t averted a surge in yields on the 10- year benchmark notes. Ten-year yields have climbed to 3.74 percent from 2.53 percent on March 18, when the central bank announced its Treasuries-purchase plan. The average rate for a 30-year mortgage rose last week to 5.22 percent from a record low of 4.78 percent soon after the announcement, according to Freddie Mac.
Yields have risen as the U.S. economy has shown signs of emerging from the worst slump since the Great Depression. The rate on the ten-year note surging 37 basis points last week, the most since March 2003, after better-than-forecast employment, home-sales and manufacturing data.
Credit markets spreads are normalizing amid signs of an economic recovery. The Libor-OIS spread, a gauge of banks’ reluctance to lend, has narrowed to 26 basis points from as high as 3.64 percentage points in October. The TED spread, the difference between what banks and the U.S. Treasury pay to borrow for three months, dropped below 30 basis points last week for the first time since March 2007.For Related News and Information:
To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net;
Last Updated: August 12, 2009 14:45 EDT
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