Treasuries rally on ECB bond purchase bets

New York: Treasuries snapped a four-week slide after Federal Reserve policymakers suggested a weakening economy may lead to more stimulus measures and concern increased that progress toward resolving Europe’s debt crisis stalled.

Hedge fund managers and other large speculators boosted futures wagers that 10-year notes will rise to the highest level since 2008, days before Fed Chairman Ben S. Bernanke speaks at a Jackson Hole, Wyoming, conference where he previewed monetary stimulus programmes the past two years. Yields declined even as the US prepares to auction $99 billion (Dh363.6 billion) in notes next week.

“The minutes repriced the market,” Thomas Connor, president and head of trading at Pierpont Securities Stamford, Connecticut, said. “I tend to think Bernanke will be somewhat noncommittal, but will keep further easing action on the table.”

The benchmark 10-year note yield dropped 13 basis points last week, or 0.13 percentage point, to 1.69 per cent at 4.48pm New York time, according to Bloomberg Bond Trader prices. It was the biggest decrease since the five days ended June 1. The yield dropped on Saturday as much as five basis points to 1.63 per cent, the lowest since August 13. The price of the 1.625 per cent security due in August 2022 gained 1 1/8, or $11.25 per $1,000 face amount, to 99 14/32. It was little changed on Saturday.

Thirty-year bond yields fell 14 basis points, also the most since June 1, to 2.79 per cent. They were also little changed on the day, after sliding five basis points earlier to 2.74 percent, the least since August 14.

Speculative long positions on 10-year note futures, or bets prices will rise, outnumbered short positions in the week ended August 21 by 97,540 contracts on the Chicago Board of Trade, the most since March 2008. The so-called net long positions more than tripled from a week earlier, the Washington-based commission said in its Commitments of Traders report.

German court ruling

Treasuries climbed on Saturday as investors sought refuge amid concern European Central Bank (ECB) president Mario Draghi may not announce a definitive bond purchase programme at the bank’s September 6 meeting. A German court is scheduled to rule on September 12 on the legality of Europe’s permanent bailout fund, and two central bank officials said Draghi may wait until after the decision. The officials requested anonymity because the deliberations are not public.

The ECB chief announced on August 2 the bank may intervene in the secondary market to reduce bond yields in countries such as Spain and Italy if they apply to Europe’s bailout fund for aid and accept the conditions attached.

Bonds pared gains on prospects that further Fed stimulus may increase appetite for risk and damp demand for the safety of government securities.

The Fed sold $7.8 billion of Treasuries on Saturday due from May 2015 to November 2015. The action was part of the central bank’s efforts to exchange shorter-term Treasuries in its holdings for those due in six to 30 years to support the economy by putting downward pressure on long-term borrowing costs.

Treasuries have “more room to rally,” according to the Barclays Plc., one of the 21 primary dealers that trade with the Fed. The rally over the past week hasn’t erased the full increase in 10-year yields over the previous four weeks, Ajay Rajadhyaksha and Vivek Shukla, analysts at Barclays Capital in New York, wrote in a client note. Yields rose 35 basis points over the four weeks ended August 17.

Rally to remain

“In the absence of policy surprises in Europe or a sudden shift in the tone of economic data — we see neither as likely — the rally is unlikely to reverse,” they wrote.

Investors should sell Treasuries and buy inflation-indexed securities, betting expectations for rising prices continue amid speculation the Fed will add further monetary stimulus, according to Citigroup Inc.

Break-even rates, the yield gap between nominal notes and Treasury Inflation Protected Securities, or Tips, from one to five years are poised to widen after the Fed’s stimulus signals last week, Jabaz Mathai, an interest rate strategist at Citigroup, said. The five-year break-even rate was 1.93 percentage points on Saturday, versus 1.68 on July 25.

Treasuries are almost the most expensive in more than two weeks, according to the term premium, a model created by economists at the Fed that includes expectations for interest rates, growth and inflation. The gauge was negative 0.84 per cent on Saturday, from negative 0.85 per cent two days ago, the most costly since August 6. It reached negative 0.70 per cent on August 16, the least costly since May. A negative reading indicates investors are willing to accept yields below what’s considered fair value.

US government securities have lost 0.7 per cent this month, paring their 2012 return to 2 per cent, according to Bank of America Merrill Lynch’s Treasury Master index.

The Treasury will auction $35 billion of two-year debt on Tuesday, the same amount of five-year notes the following day and $29 billion of seven-year securities on Thursday. The amounts were unchanged from last month’s sales of the securities.

Bonds extended gains earlier after data showed bookings for non-military capital equipment, excluding planes, slumped 3.4 per cent, the most in eight months, a Commerce Department report showed on Saturday in Washington.