The difference between yields on 2- and 10-year Treasuries widened to the greatest amount since September on trader speculation about how much debt the Federal Reserve may buy if it resumes purchases of U.S. securities.
Government notes maturing in five years and less were little changed as St. Louis Fed PresidentJames Bullard said the size of asset buys in a strategy known as quantitative easing should be based on economic conditions, starting with $100 billion next month. Some previous forecasts have topped $1 trillion for the next year. The U.S. will sell $109 billion in notes and Treasury Inflation Protected Securities next week.
“People have been pushed into a corner with all the debate and uncertainty about QE2,” saidPaul Horrmann, a broker in New York at Tradition Asiel Securities Inc., an interdealer broker. “It will be a tough time with the volatility until we find out more about what’s going on.”
The yield curve, the gap between 2- and 10-year yields, steepened to 2.204 percentage points, the most since 2.273 percentage points on Sept. 17.
The benchmark 10-year note yield fell less than one basis point, or 0.01 percentage point, to 2.55 percent in New York, from 2.56 percent on Oct. 15. It reached a 2010 high of 4.01 percent in April. The 2.625 percent security due in August 2020 traded at 100 19/32, according to BGCantor Market Data.
The two-year note yielded 0.35 percent, near the record low of 0.327 percent set Oct. 12. The seven-year yield fell two basis points to 1.86 percent, while the 30-year bond yield dropped five basis points to 3.93 percent, after touching a 2010 high of 4.86 percent in April.
Stocks Beat Treasuries
Treasuries returned 0.25 percent this week and lost 0.06 percent for October, according to a Bank of America Merrill Lynch index. That compared with gains of 0.6 percent and 3.7 percent by the Standard & Poor’s 500 Index.
Alan Blinder, former vice chairman of the Fed, said yesterday policy makers are improvising as they debate easing, “making it up as they go along.” They probably won’t announce a “shock-and-awe” purchase effort next month and will more likely “dribble it out” by buying in smaller increments, Blinder said in an interview on “Bloomberg Surveillance” with Tom Keene.
Investors have been debating how much debt the Fed may buy to spur inflation and employment since Chairman Ben S. Bernanke said Oct. 15 there appears to be a “case for further action.” The central bank completed purchases of about $1.7 trillion of debt in March to support the recovery, including $300 billion in Treasuries in 2009. The policy-setting Federal Open Market Committee next meets Nov. 2-3.
‘What Is Left?’
“The problem that the Fed faces is that if this doesn’t work, then what is left?” Kevin Giddis, president of fixed- income capital markets at the brokerage firm Morgan Keegan Inc. in Memphis, Tennessee, wrote in a note to clients. “The Fed has some big decisions to make.”
The central bank will say after its policy meeting it will acquire securities at a rate of $100 billion per month for an initial total of $500 billion to $700 billion, Citigroup strategists led by Amitabh Arora in New York wrote in a research note yesterday. The firm is one of 18 primary dealers that trade with the Fed.
Bill Gross, Pacific Investment Management Co.’s co-founder and manager of the world’s biggest mutual fund, said Oct. 8 on Bloomberg TV the central bank may buy about $100 billion in government debt a month, or $1.2 trillion over the next year.
“The Fed should definitely try and expand its balance sheet a lot -- at least $1 trillion or so if they want to make a dent on the lack of liquidity,” Dominic Konstam, global head of interest rates research in New York at primary dealer Deutsche Bank AG, said yesterday in an interview on Bloomberg Radio.
Note Auctions
The U.S. will auction $35 billion in two-year notes, an equal amount of five-year securities and $29 billion in seven- year debt in sales that begin Oct. 26, the Treasury said Oct. 21. While the $99 billion package is bigger than the $97 billion forecast in a Bloomberg News survey, it’s $1 billion smaller than the last offering of the maturities in September.
The Treasury will also sell $10 billion of five-year inflation-indexed securities on Oct. 25.
Global demand for U.S. stocks, bonds and other financial assets rose in August, a report showed Oct. 18, as investors bought Treasuries in anticipation of more Fed bond purchases. Net buying of long-term equities, notes and bonds totaled $128.7 billion in August compared with net buying of $61.2 billion in July, according to data from the Treasury Department.
Total foreign purchases of Treasury notes and bonds were $117 billion in August, compared with purchases of $30 billion in July, the data showed.
‘Forward Guidance’
Bullard of the St. Louis Fed proposed Oct. 21 that the central bank acquire long-term Treasuries next month and consider more purchases later in units of $100 billion.
“We could give forward guidance for the next meeting that would suggest how likely the committee thinks we would continue these purchases,” Bullard said at a conference.
Some investors are betting Fed efforts to spur the economy will lead to faster inflation, yields indicate.
The difference between the rate on 30-year bonds and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, widened to 2.54 percentage points yesterday from 2.12 percentage points on Oct. 1. The five-year average is 2.40 percentage points.
To contact the reporter on this story: Susanne Walker in New York atswalker33@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
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