Treasuries Extend Steepest Weekly Gain in 13 Months

Bloomberg: Treasuries rose for a fifth day after comments this week from Federal Reserve Chairman Ben S. Bernanke snapped the rout triggered in June when he said the central bank was prepared to end bond purchases this year.

Benchmark 10-year yields headed for their biggest weekly decline in 13 months after Bernanke said July 10 that “highly accommodative monetary policy” was needed for the foreseeable future to support the economy. The yield climbed to the highest level since August 2011 earlier this week on speculation the Federal Open Market Committee will scale back stimulus. Bernanke will deliver his semi-annual monetary policy report to Congress in Washington on July 17.

“The Treasury market has reacted to the dovish stance from Bernanke this week,” said Vincent Chaigneau, global head of rates and foreign-exchange strategy at Societe Generale SA in Paris. “We’ve had a technical recovery but I don’t think it’s going to run very far. There’s a limit to how much Bernanke can deviate from the stance of the FOMC.”

The benchmark 10-year yield fell four basis points, or 0.04 percentage points, to 2.53 percent at 10:33 a.m. London time, according to Bloomberg Bond Trader prices. The 1.75 percent note due May 2023 rose 3/8, or $3.75 per $1,000 face amount, to 93 1/4. The yield has fallen 21 basis points this week, the most since the period ended June 1, 2012.

Societe Generale forecasts the 10-year yield will rise to 3.25 percent by the end of the year, Chaigneau said. The bank previously predicted an increase to 2.75 percent.

Auction Demand

Demand at this week’s U.S. Treasury debt auctions suggests appetite for government bonds is increasing.

Investors bid an average of $2.89 for each $1 of the $66 billion in three-, 10- and 30-year securities auctioned over the past three days. The bid-to-cover ratio was 2.71 for $99 billion of two-, five- and seven-year notes sold in the three days ended June 27.

Bernanke told reporters on June 19 the Fed may begin to slow its $85 billion in monthly bond purchases this year and end them in 2014 if economic growth meets policy makers’ goals. The purchases have increased the Fed’s balance sheet to a record $3.5 trillion.

Fed Bank of St. Louis President James Bullard, who has advocated an increase in stimulus if inflation slows, is due to speak today in Jackson Hole, Wyoming.

Volatility in Treasuries measured by the Merrill Lynch Option Volatility Estimate MOVE Index dropped to 93.54 yesterday, the lowest since June 19. It climbed 117.89 on July 5, the most since December 2010. The one-year average is 64.14.

Volume Rises

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, rose to $348.8 billion yesterday, the highest since July 5. Volume has averaged $300 billion a day this month, versus $446.2 billion in June.

The 10-year yield will rise to 2.62 percent by year-end, according to the median forecast of economists surveyed by Bloomberg News July 5-10. The figure is up from a median forecast of 2.33 percent in a June 7-12 survey.

The market is expecting the first interest-rate increase in the summer of 2015, Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., wrote on Twitter yesterday. “Pimco says later,” he wrote. Investors should favor five-year Treasuries, the posting said. Gross runs the $268 billion Total Return Fund (PTTRX) in Newport Beach, California.

The Fed has kept its target for overnight bank lending in a range of zero to 0.25 percent since December 2008. It has said it will consider raising the target when the unemployment rate falls to 6.5 percent, versus 7.6 percent as of June.

Producer Prices

Reports today will show U.S. producer prices rose 0.5 percent in June, matching May’s gain, and consumer confidence increased in July, based on Bloomberg surveys of economists.

Thirty-day federal funds futures contracts for delivery in April 2015 yielded 0.51 percent, indicating investors expect the Fed target to be higher by then.

As recently as July 5, the securities for delivery in February 2015 were indicating an increase in the Fed target. The contract settles at the average overnight fed funds rate for the delivery month.

Akira Takei, head of international fixed-income department at Mizuho Asset Management Co. inTokyo, said 10-year yields may fall to 1.50 percent by year-end.

“Bernanke’s speech is very constructive for the U.S. Treasury market,” said Takei, who helps oversee the equivalent of $32 billion at the unit of Japan’s third-biggest publicly traded bank by market value. “He clarified that the beginning of tapering and the raising of interest rates is quite a different story. He tried to calm down the market.”

Treasuries handed investors a loss of 3 percent in the past three months through yesterday, based on Bloomberg World Bond Indexes.

reporters on this story: Neal Armstrong in London