Bonds fall on reduced QE2 bets, 5Y auction

By Ellen Freilich

NEW YORK (BestGrowthStock) – U.S. government debt prices fell on Wednesday as traders reduced bullish bets on the Federal Reserve’s next bout of bond purchases and the five-year debt sale fetched lukewarm demand.

Doubt about the aggressiveness of the Fed’s next asset purchases hurt bond prices, but the latest data on new home sales and business spending supported the view another round of bold quantitative easing, known as “QE2,” was needed.

The Fed is expected to outline its asset purchase program after the U.S. central bank’s policy meeting November 2-3.

Some analysts estimated the Fed would buy $2 trillion in Treasuries in the coming months, but there is no consensus how aggressively the Fed will accumulate Treasuries.

Robert Tipp, chief investment strategist at Prudential Fixed Income in Newark, New Jersey, said bond investors had gotten very optimistic about an aggressive Fed easing program and then had some second thoughts.

“But at the end of the day, I would guess the sell-off (would) run out of steam between now and next week,” he said.

Meanwhile, the government sold $35 billion in five-year notes auction, which is part of this week’s $109 billion in coupon-bearing supply, at a yield of 1.330 percent.

Traders had expected the new issue due Oct 2015 to clear at a yield of 1.324 percent, shortly before the Treasury announced the auction results.

Benchmark 10-year Treasury notes were down 14/32 in price with their yields at 2.70 percent. Earlier, the 10-year yield touched a one-month high of 2.71 percent.

Bond and stock prices reflect the debate over whether the Fed can pull the economy back from deflation.

When bonds rally and stocks sink, investors are showing a lack of confidence in an economic resurgence.

The conviction that the economy will recover, or reflate, and produce employment, would push stocks up and weaken bonds, pushing Treasury yields higher.

Bill Gross, manager of the world’s largest bond fund at Pacific Investment Management Co., said a resumption of asset purchases by the Federal Reserve would likely signify the end of the “great” 30-year bull market in bonds.

“The Fed’s announcement will likely signify the end of a great 30-year bull market in bonds and the necessity for bond managers and, yes, equity managers to adjust to a new environment,” Gross wrote in his monthly outlook posted on Newport Beach, California-based Pimco’s website on Wednesday.

The Fed has already spent $1.7 trillion in large-scale asset purchases to bolster lending and the economy and some analysts say that, over time, it could buy up to another $2 trillion in assets.

(Additional reporting by Richard Leong and Emily Flitter; Editing by Andrew Hay)

Bonds fall on reduced QE2 bets, 5Y auction