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Treasurys recover ahead of auctions
NEW YORK (Reuters) — U.S. Treasury prices edged higher Monday as investors ventured back into the market following Friday’s sell-off, lured in part by fresh evidence that interest rates would remain low.
Yields, which move inversely to prices, retreated from three-week highs ahead of three Treasury auctions this week, the first of which is set for Tuesday.
“The auctions are definitely the focus of the week,” said George Goncalves, the head of fixed income rates strategy at Cantor Fitzgerald in New York. “Outside of that I think we’re going to be met with decent demand and the markets are really going to get into a slow period.”
There was little economic data to digest Monday. But
by Federal Reserve Chairman Ben Bernanke offered new reassurance that the Federal Reserve was not going to raise interest rates soon despite the slower pace of U.S. labor market deterioration, news that triggered a sell-off in government bonds when it was released Friday.
Bernanke told the Economic Club in Washington, D.C. there was some way to go before policymakers could be sure the U.S. economic recovery could be self-sustaining. He forecast modest growth in 2010, enough to lower the jobless rate slowly, but said the economy still faced considerable headwinds.
Two-year notes, which are particularly sensitive to changing views on Fed policy, rose 4/32 in price, their yields easing to 0.78% from 0.84%Friday when they suffered their worst sell-off since June.
Speaking at the Reuters Investment Outlook 2010 Summit, economist Henry Kaufman said Monday even if the Fed did raise interest rates later next year, the impact of such a move on financial markets should not be exaggerated.
If the Fed raised the federal funds rate target from its current range of zero to 25 basis points to 50 basis points, that would still mean that the rate was “exceedingly low,” said Kaufman, president of the financial consulting firm Henry Kaufman & Company Inc.
Even a fed funds rate of 1% would be exceedingly low, he said, adding that the Fed would be unlikely to move rates in a dramatic fashion and that rate hikes would lag the economic recovery, not move contemporaneously.
The Fed will not use a “sledge hammer,” and any rate increase would be accompanied by “conciliatory language,” Kaufman said.
The U.S. Treasury plans to sell $40 billion in three-year notes, $21 billion in reopened 10-year notes and $13 billion in reopened 30-year bonds on Tuesday, Wednesday and Thursday, respectively.
“Supply will once again challenge the market, but less so given last week’s yield adjustment,” said John Spinello, chief fixed-income technical strategist at Jefferies in New York.
On the other hand, remaining skepticism about the sustainability of an economic recovery would be supportive for Treasurys, he said.
In addition, strong seasonal demand for U.S. government debt at year end should be supportive, analysts said.
The benchmark 10-year Treasury note was up 11/32, its yield easing to 3.44% from 3.48% Friday.
Buying emerged Monday when the 10-year yield moved toward 3.50% and the front end held support, Spinello said.
Support for the 10-year Treasury note now lies in the area between 3.47% and 3.51% and selling should emerge when the yield eases back to 3.425% to 3.375%, he said.
The 30-year long bond rose 5/32, its yield easing to 4.39% from 4.40% Friday.