NEW YORK: Long-dated US Treasuries prices fell o n M onday as investors bet on the increasing likelihood of a third Federal Reserve bond purchase program, which stoked worries of higher inflation.
The Fed is seen as likely to launch a new quantitative easing program when its policymakers meet later this week, as it struggles with a sluggish US economy and a stubbornly high jobless rate.
In its prior two rounds of stimulus, the US central bank bought a total of about $2.3 trillion in US Treasuries and mortgage-backed bonds to lower long-term interest rates to help revive the economy.
A weaker-than-expected US payrolls report on Friday boosted bets of further stimulus, though price gains have been capped by inflation fears and as some traders remain skeptical that new purchases are guaranteed.
"After the payroll number on Friday the probability has increased," said Sean Simko, senior portfolio manager at SEI Investments in Oaks, Pennsylvania.
That said, "the Fed may want to continue to watch the environment and remain sidelined and see what develops over the course of the next couple of weeks," he added.
Treasuries initially rallied strongly after Friday's data showed that employers added 96,000 jobs in August, below economists expectations of 125,000.
The debt has since given back much ground as investors focus on potential price pressures from any new program.
"Of the possible consequences of what the Fed could do, the market is focusing only on the most negative one. The prospect of increasing inflation expectations," said Jim Vogel, interest rate strategist at FTN Financial in Memphis, Tennessee.
Intermediate-dated Treasuries have been among the best performers on expectations the Fed would extend purchases to mortgage-backed securities with maturities of around five years.
Five-year Treasuries yields rose to 0.65 percent on Monday, after falling as low as 0.60 percent on Friday.
Benchmark 10-year Treasuries yields rose to 1.68 percent, up 1 basis point on the day. The 10-year yield touched 1.59 percent on Friday in reaction to the disappointing jobs figures.
Thirty-year bonds yields, which are bearing the brunt of inflation fears, increased to 2.84 percent, up from a low of 2.71 percent on Friday. They fell briefly at midday on below-average volume.
Breakeven levels on five-year Treasury Inflation-Protected Securities, which measure expected inflation, increased to 2.04 percent on Monday, the highest since early May, and up from 1.98 percent on Thursday, before the jobs data.
The yield gap between 10-year notes and 30-year bonds also expanded, to 116 basis points on Monday, out from 112 basis points on Thursday and the widest level since mid-May.
The spread between five-year notes and 30-year bond yields widened to 219 basis points, from 212 basis points on Thursday and also the widest level since mid-May.
SUPPLY MAY WEIGH
New Treasury supply of $66 billion scheduled for this week is also seen weighing on debt prices.
In the private debt market, fourteen high-grade deals were scheduled o n M onday for sale this week. Some analysts estimated this week's investment-grade corporate debt offerings could total $30 billion, according to IFR, a unit of Thomson Reuters.
Some investors are concerned with the timing of the sale of $13 billion in new 30-year Treasury bonds, which will be auctioned on Th ursday just before the Fed gives the statement from its two-day meeting.
This week's sales will also include $32 billion in three-year notes on Tuesday and $21 billion in 10-year notes on Wednesday.
Ten-year Treasuries have technical support at yields of around 1.69 percent through 1.74 percent, though if yields break above this level, there is little support until the 1.80 percent area, said FTN's Vogel.
The Fed bought $1.35 billion in Treasury Inflation-Protected Securities due between 2028 and 2042 o n M onday as part of Operation Twist.
This program involves buying long-term debt and funding the purchases with sales of shorter-term debt in an effort to reduce long-term borrowing rates.
Other closely watched events this week will include a ruling by Germany's Constitutional Court on Wednesday on whether the euro zone's permanent bailout fund is compatible with German law, a vital condition for it to come into force.
The Netherlands will hold elections the same day.
Comments
Comments are closed.