Treasury prices up as higher yields, Fed hopes draw buyers

By Chris Reese

NEW YORK (BestGrowthStock) – A recent rise in yields and talk of aggressive quantitative easing by the Federal Reserve drew buyers to U.S. Treasuries on Thursday and bolstered demand in an auction of seven-year Treasury notes.

The move higher in price comes ahead of next week’s expected U.S. Federal Reserve announcement on the scope of a program to buy more assets to help support the economy.

Doubts about the size of the Fed’s next asset purchases encouraged some price-cutting this week, pushing yields high enough to draw buyers back into the market.

Some of the doubts appeared to dissipate Thursday amid talk of eventual Fed purchases of up to $1 trillion.

The middle, or belly, of the curve outperformed longer maturities, reversing some of the selling that occurred early this week ahead of supply.

The Treasury’s auction of $29 billion of seven-year notes on Thursday afternoon brought a lower yield than expected — evidence of aggressive bidding for the securities.

“With this being the last auction before month-end, and indeed the last supply point before QE2 next week, we expected this to be a successful auction and it was,” said John Briggs, U.S. interest-rate strategist at RBS Securities in Stamford, Connecticut, adding “the fact that seven years stand to benefit greatly from additional Fed purchases was an additional support for the sector.”

Indeed, seven-year notes were the strongest performer on the Treasury curve, gaining 21/32 in price to yield 1.94 percent, down from 2.04 percent late on Wednesday. Benchmark 10-year notes were 17/32 higher to yield 2.66 percent from 2.72 percent.

The Treasury had already auctioned five-year TIPS, and two- and five-year notes on Monday, Tuesday and Wednesday, respectively.

Broadly speaking, prospects for large-scale purchases by the Federal Reserve, beginning as soon as next week, supported bond prices.

The Fed is expected to outline an asset purchase program after its policy meeting November 2-3, and the market sees several possible scenarios.

One is for about $500 billion over five months promised, with hints of more. This scenario has probably been priced into the market, traders said.

Another is for a more aggressive program, amounting to asset purchases worth $750 billion to $1 trillion, also with hints of more, if needed.

A Reuters poll Wednesday found that most leading economists expect the Fed to buy between $80 billion and $100 billion in assets per month, with totals ranging widely from $250 billion to as high as $2 trillion.

“An amount of $500 billion is priced in,” said Chris Diaz, co-manager of the Global Bond Fund at ING Fixed-Income in Atlanta, the latter with $110 billion in fixed-income assets under management in the United States.

“We think the Fed will announce purchases to be made on a monthly basis, and contingent upon how the economy responds in terms of the Fed’s dual mandate of achieving full employment and price stability,” Diaz said.

Diaz said talk of purchases totaling as much as $2 trillion at one point allowed the bond market to build up its expectations. If those expectations had solidified, the market could have been “a little underwhelmed” by what the Fed really “feels comfortable precommitting to,” he said.

If the Fed’s announcement disappoints expectations built into the market, interest rates would head up and risk assets would likely sell off, Diaz said.

“Clearly the rally in the stock market, the depreciation of the dollar, the rally in U.S. interest rates are all correlated. This is a reflationary, quantitative easing trade going on,” he said. “If the Fed disappoints the market, you’d see a partial reversal of this reflationary trade.”

A government report that U.S. jobless claims fell in the latest week briefly shrank the Treasury market’s best gains.

(Additional reporting by Ellen Freilich; Editing by Andrew Hay)

Treasury prices up as higher yields, Fed hopes draw buyers