Tuesday, December 7, 2010

Treasurys Rise; 10-Year Yield Below 3%


NEW YORK—Treasurys rose broadly on supportive comments from Federal Reserve Chairman Ben Bernanke.

An extra boost came from continued worries about sovereign-debt problems in the euro zone, and the Fed's buying $2.044 billion in Treasurys maturing between August 2028 and November 2040. The purchase is part of the central bank's $600 billion bond-buying program, known as quantitative easing, aimed at boosting economic recovery.

The benchmark 10-year note's yield, which moves inversely to its price, fell below 3% again after hitting 3.062% on Friday, the highest level since July.

Yet the bond market faces $66 billion in new government-debt supply. The Treasury Department will sell $32 billion three-year notes on Tuesday, $21 billion in 10-year notes Wednesday and $13 billion in 30-year bonds on Thursday.

"Bernanke's comments overnight and the Fed's purchase today helped support the bond market," said James Golden, head of Treasury trading in New York at Jefferies & Co. "However, taking supply at these yield levels isn't in the cards unless we see better buying between now and the auctions."

As of 2:52 p.m. EST, the benchmark 10-year note was 17/32 higher to yield 2.944%. The 30-year bond was 30/32 higher to yield 4.260% and the two-year note was 3/32 higher to yield 0.429%.

In an interview with CBS television aired on Sunday, Mr. Bernanke said "it's certainly possible" the Fed could expand a program to buy $600 billion in Treasury securities beyond the initial target it announced about a month ago.

Mr. Bernanke warned that the economic recovery "may not be" self-sustaining, highlighting the chance of unemployment staying high for a protracted period as "the primary source of risk that we might have another slowdown in the economy."

The weak labor market has been one of the key reasons behind the Fed's efforts to support the economy with quantitative easing. In the latest key payrolls report on Friday, the jobless rate unexpectedly rose to 9.8% in November from 9.6% a month ago.

"It is hard to fight against the Fed," said Russ Certo, co-head of rate trading at Gleacher & Co., a boutique investment bank and bond dealer.

Michael Franzese, head of Treasury trading at Wunderlich Securities in New York, said the 10-year note's yield will likely trade in a range of 2.83% and 3.08% over the next few weeks.

The five-year and seven-year notes, the favored target for the Fed's bond-buying program, were the best performers. The five-year note's yield fell by about 0.10 percentage point to 1.519%, extending Friday's rally after the weak nonfarm payrolls report.

Mr. Certo said Mr. Bernanke's comments made it difficult for primary dealers—the 18 banks obligated to bid on Treasury auctions—to set up for this week's supply.

Usually primary dealers tend to push down bond prices as a way to lure buyers to bid on the auctions. Yet Mr. Bernake's comments gave the bond market a lift, so many primary dealers resorted to other strategies, like selling Treasurys that will bear the supply pressure, such as the 10-year and 30-year sectors, and buying other maturities such as the five-year and seven-year notes, said Mr. Certo.

After forecasting lower Treasury yields for the past two years, Goldman Sachs Group Inc. said Monday that it is no longer a bull.

Francesco Garzarelli, chief interest-rate strategist at Goldman Sachs in London, said the 10-year note's yield will likely rise to 3.3% by the end of 2011 and climb to 3.8% by the end of 2012.

The higher yields reflected the company's optimism on the economic outlook, which will cut demand for safe-harbor Treasurys and boost buying in stocks. Economists at Goldman last week raised their forecast for both the global and U.S. economic outlook for 2011.

Write to Min Zeng at min.zeng@dowjones.com

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