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TREASURIES-Prices rebound from Friday's sharp sell-off
September 17, 2012 / 8:13 PM / 5 years ago

TREASURIES-Prices rebound from Friday's sharp sell-off

* Longer-dated yields recede from four-month highs
    * Fed buys longer-dated Treasuries, sells shorter-dated
    * New York Fed business index lowest since April 2009

    By Chris Reese
    NEW YORK, Sept 17 (Reuters) - U.S. Treasury debt prices rose
o n M onday as investors did some bargain-hunting following a
sharp sell-off last week that was tied to inflation fears and
reduced safety bids on optimism about the European debt crisis.
    Longer-dated yields retreated from their highest levels
since May, which were set o n F riday when investors sold
Treasuries on fears a Federal Reserve plan to do a third round
of bond purchases would fuel rising inflation.
    Monday's "bounce in Treasuries was a function of attractive
levels rather than fundamentals," said Ian Lyngen, senior
government bond strategist at CRT Capital Group in Stamford,
    Weaker U.S. economic data and concerns about slowing growth
in China also revived some bids for bonds, pushing yields lower.
    "Rates will grind lower in the short term because economic
data will remain tepid," said Eric Green, global head of rates
and FX research and strategy with TD Securities in New York.
    The New York Federal Reserve said on Monday its measure of
regional business activities unexpectedly worsened in September,
falling to its lowest level since April 2009. 
    Investors have been assessing the longer-term impact of the
open-ended bond-buying programs from the Fed and the European
Central Bank with the goals of lowering unemployment and
averting a regional recession, respectively.
    They are concerned that by injecting more cash into the
banking system, the two central banks are hurting their
currencies and will have a tougher time containing inflation
once economic growth normalizes.
    The Fed said last Thursday it will buy $40 billion a month
in mortgage-backed bonds on an open-ended basis, its third round
of bond buying, or quantitative easing, dubbed QE3. It also
prolonged its pledge to hold interest rates near zero into
mid-2015, from late 2014. 
    "The reflation trade is not going away," said Charles
Comiskey, head of Treasury trading at Bank of Nova Scotia. He
added that the Fed is squarely focused on reducing unemployment
while tolerating higher inflation.
    This perception has fueled a rally in Treasury
Inflation-Protected Securities since the Fed began QE3 on
    The yield premiums, or inflation breakeven rates, on regular
Treasuries over TIPS jumped broadly. The 10-year TIPS breakeven
rate, which gauges investors' inflation expectations, touched
2.64 percentage points on Friday, the highest since April 2011,
according to Reuters data.
    On Monday the 10-year breakeven rate was 2.58 points.
    Another indicator that showed growing inflation concerns
among investors was a steepening yield curve, or widening
spreads between shorter- and longer-dated yields.
    The spread between five-year and 30-year yields ended at
2.37 percentage points on Friday, the widest since September
last year. It was at 2.32 points at midday on Monday.
    The 30-year bond traded 1-6/32 higher in price
to yield 3.03 percent, down from 3.09 percent late Friday.
    The Fed did two operations on Monday under its stimulus
program, which has been nicknamed "Operation Twist." It bought
$4.74 billion in Treasuries due November 2020 through August
2022, and later sold $7.799 billion in debt maturing December
2014 through May 2015.
    Operation Twist, which began last year and will continue
into the end of this year, was intended to lower mortgage rates
and other long-term borrowing costs. Under the program, the Fed
sells its holdings of shorter-dated Treasuries and buys
longer-dated issues on the open market.
    Benchmark 10-year notes traded 11/32 higher in
price to yield 1.83 percent, down from 1.87 percent late Friday.
    Trading volume was lighter-than-usual due to a holiday in
Japan and the Jewish New Year.

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