Bonds flat; easing views offset data, earnings

By Richard Leong

NEW YORK (BestGrowthStock) – U.S. government debt prices were little changed on Tuesday as several Federal Reserve officials expressed the need for more policy easing, which offset solid bank results and less grim housing data.

Traders interpreted remarks from several senior Fed officials as reassurance that the U.S. central bank will shortly engage in a second round of asset purchases known as quantitative easing, dubbed “QE2,” in an effort to stimulate private investments by holding down long-term interest rates.

The move, which is widely expected after the Fed’s Nov 2-3 policy meeting, is also seen as a bid to avert deflation where prices spiral lower and hurt an economy like Japan for years.

“Policy-makers are focusing on the price stability side of the equation,” said Guy LeBas, chief fixed-income strategist with Janney Montgomery Scott in Philadelphia.

Tuesday’s remarks from Fed officials countered earlier bond-negative news, as solid quarterly earnings from Bank of America (BAC.N: ) and Goldman Sachs (GS.N: ) reduced worries over the effect of renewed foreclosure problems on the sector.

Bank shares have been under selling pressure on their potential exposure from a massive probe into foreclosure practices.

Stronger-than-expected readings on housing starts also exerted downward pressure on bonds by soothing some concerns over the toll the still-weak housing market was having on the economy. Developers broke ground at the fastest rate in five months in September.

Analysts said hedging on corporate bond supply has the Treasury market in a tight trading range.

Separately, China’s rate hike since 2007 spurred chatter over its future purchases of Treasuries amid U.S. pressure to further increase its currency flexibility against the dollar. But analysts said the surprise move was not a factor in the bond market.

The benchmark 10-year note last traded down 2/32 in price to yield 2.52 percent, flat from late Monday, while the 30-year bond was 3/32 lower to yield 3.96 percent, unchanged from late Monday.

QE2’S COSTS, BENEFITS

Since late August, growing bets of more bond purchases from the U.S. central bank have rallied the Treasuries market, sending short and intermediate yields to record lows.

But some investors worry that the long-term cost of Fed’s increased purchases of Treasuries is higher inflation, making long-dated U.S. government debt less attractive.

The record spread between the yields on 10-year and 30-year Treasuries and the high volatility of the long bond, are proxies of investors’ nervousness over QE2 on inflation.

“That’s a forward vote on Fed policy. Longer-term inflation is going to be a problem,” said Michael Kastner, partner at Halyard Asset Management in White Plains, New York.

The 50-day volatility average on the 30-year bond is about 30 percent, higher than the 18 percent on the S&P 500 index (.SPX: ), Kastner said.

Fed officials, while acknowledging the risks of injecting more stimulus, have said the benefits from QE2 are needed to bring down high unemployment and to boost economic activity,

Atlanta Fed President Dennis Lockhart on Tuesday told CNBC television that QE2 has to be large enough to help boost demand, and securities purchases of $100 billion a month would be a possibility.

At a separate event, Chicago Fed chief Charles Evans said it would make sense for the Fed to put in place a so-called price-level target that would have it shoot for above-target inflation to compensate for falling short of the mark now.

Last Friday, Fed Chairman Ben Bernanke said policymakers would like to see inflation at about 2 percent, rather than 1 percent or so right now.

(Reporting by Richard Leong; Editing by Diane Craft)

Bonds flat; easing views offset data, earnings