Bonds fall on data, stocks, gradualist QE talk

By Ellen Freilich

NEW YORK (BestGrowthStock) – U.S. Treasuries prices fell on Thursday as stock market gains and slightly firmer economic data damped demand for U.S. safe-haven debt.

Remarks by a Federal Reserve official that he would back incremental purchases of U.S. Treasuries also disappointed some investors.

St. Louis Fed President James Bullard said on Thursday he would back Fed purchases of Treasury securities in $100 billion increments meeting-by-meeting if the Fed decides monetary easing is necessary, but stressed no decision has been made.

This more gradualist approach fell short of the “shock and awe” strategy for which some market participants hoped.

Markets believe the Fed will begin another round of asset purchases after its November 2-3 policy meeting, but debate over how aggressive the Fed will be has dominated the bond market.

“Bullard sounded less aggressive than what some other members of the (Federal Open Market) committee want,” said John Spinello, senior vice president and chief fixed-income analyst at Jefferies & Co in New York. “That Bullard would make these statements right now leads people to think there might be some compromise that might be less than what the doves want.”

The Fed cut interest rates to near zero in December 2008 and followed that with purchases of $1.7 trillion of longer-term securities to pull the economy out of recession.

Though the downturn officially ended in June 2009, high unemployment and anemic growth have pushed the Fed to consider more monetary easing, which most analysts expect at the Fed’s next policy meeting on November 2-3.

The weakest performer along the maturity curve on Thursday was the 30-year Treasury bond, which fell more than a point.

“The long bond has been the big loser because the Fed is unlikely to buy anything past 10-years,” said Ray Humphrey, co-manager of The Hartford Inflation Plus Fund in Hartford, Connecticut.

The 30-year Treasury bond fell 1-5/32, its yield rising to 3.96 percent from easing to 3.90 percent from 3.89 percent on Wednesday.

U.S. Treasuries added to early losses on news of a slightly bigger-than-expected drop in weekly job claims, soothing some worries over further deterioration in the labor market.

The U.S. Labor Department said first-time filings for unemployment benefits totaled 452,000 in the latest week, compared with an upwardly revised 475,000 a week earlier.

The Fed Bank of Philadelphia’s mid-Atlantic factory activity index improved slightly in October, while the Conference Board’s leading indicators index rose 0.3 percent, with the biggest positive contributors being rate spreads, lower jobless claims, and growth in the money supply.

The second straight day of stock market gains also weighed on safe-haven U.S. government debt.

The U.S. Treasury will sell a combined $99 billion in two-year, five-year and seven-year debt next week, $1 billion less than the amount sold in September. It will also sell $10 billion in 5-year inflation-protected bonds.

With the Fed expected to be buying Treasuries in the near future, the market should have little trouble digesting these securities, analysts said.

“This maturity area has been easy to finance given the deep pocket foreign/domestic desire to own the expensive belly of the U.S. curve,” Spinello said.

Treasuries have been choppy this week on light flows as traders wait for the Fed’s announcement of QE2 after its November 2-3 meeting.

“The market is really struggling with the anticipation of the second round of quantitative easing, trying to decipher or predict where on the curve the Fed is likely to make the most impact,” Humphrey said.

“Investors buying maturities of five years or less feel pretty secure there will be significant demand by the Fed at that part of the curve,” he said. “The question is how much demand will be at the five- to 10-year part of the curve.”

The 10-year note last traded down 18/32 in price for a yield of 2.55 percent, up 2.48 percent late on Wednesday.

Bonds fall on data, stocks, gradualist QE talk