Treasury 10-year note yields dropped to almost the lowest level this month as Federal Reserve Bank of New York President William C. Dudley said the U.S. economy has yet to show “any meaningful pickup” in momentum.
Prices of government securities rose for a second day after Dudley said policy makers must “forcefully” push against economic headwinds as the U.S. has yet to show “any meaningful pickup” in momentum. Atlanta Fed President Dennis Lockhart also spoke and Dallas Fed President Richard Fisher will deliver a speech Monday. Debate over the U.S. federal budget and the debt ceiling, is also renewing concern of a government shutdown, debt default or near-miss that may roil financial markets.
“Dudley's comments were pretty dovish across the board,” said Jason Rogan, managing director of U.S. government trading at Guggenheim Securities LLC, a New York-based brokerage for institutional investors. “It's important to see what their thinking is and how strongly convinced they are on the non- tapering approach.”
The benchmark 10-year yield fell three basis points, or 0.03 percentage point, to 2.7% at 11:14 a.m. New York time, according to Bloomberg Bond Trader prices. The 2.5% note maturing in August 2023 rose 8/32, or $2.50 per $1,000 face amount, to 98 8/32.
The yield dropped 15 basis points last week, the steepest decline since the period ended July 12. The 10-year note yield fell on Sept. 18 to 2.67%, the lowest since Aug. 13.
The Treasury is scheduled to sell $33 billion of two-year securities tomorrow, $35 billion of five-year notes the following day and $29 billion of seven-year debt on Sept. 26.
On Monday, the Fed purchased $3.7 billion of Treasuries maturing from June 2019 to July 2020 as part of its stimulus program.
“The economy still needs the support of a very accommodative monetary policy,” Dudley, who is vice chairman of the Federal Open Market Committee, said Monday in the text of remarks for a speech in New York. “Improving economic fundamentals versus fiscal drag and somewhat tighter financial conditions are pulling the economy in opposite directions, roughly canceling each other.”
Fed Chairman Ben S. Bernanke cited the danger to the economy from the budget battles as one reason the central bank decided not to pull back on its monetary stimulus.
“Upcoming fiscal debates may involve additional risks to financial markets and to the broader economy,” Bernanke said at a Sept. 18 news conference following the Fed's two-day meeting.
Fed Vice Chairman Janet Yellen is the leading candidate to replace Bernanke if he steps down in January, according to a survey by Bloomberg News. Lawrence Summers, who was seen as the probable pick and more likely to tighten monetary policy sooner, withdrew his candidacy.
Lockhart who also spoke in New York, said U.S. monetary policy should focus on creating a more dynamic economy following a recent slowing in growth. Fisher will speak at the Independent Bankers Association of Texas Annual Convention in San Antonio.
The market for U.S. government debt has yet to react to any potential impasse over raising the borrowing ceiling. Treasuries that mature on Oct. 15 yield negative 0.04%, compared with negative 0.03% two weeks earlier. The rate on debt due Nov. 7 have risen to 0.015% from 0.005% during that span.
“People are still regrouping,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee. “People are not going to make any major commitments until next week's economic data. There's no obvious market impact from the politics, instead it's the potential drag to the economy. The range on the 10-year yield is 2.68% to 2.78% this week.”
Treasuries have lost investors 2.95% this year, according to Bloomberg U.S. Treasury Bond index. The securities returned 2.2% in 2012.
Demand for new Treasuries from their biggest owners is proving impervious to rising yields and the retreat of Wall Street dealers.
Bids submitted by investors including mutual funds, foreign central banks, pension managers and insurance companies totaled 83% of Treasury debt auctioned this year, compared with 84% in 2012 and 37% in 2008 at the peak of the worst financial crisis since the Great Depression, according to data compiled by Bloomberg.
Consistent demand from investors who control 81% of the $11.6 trillion in Treasuries is helping balance declining purchases from bond dealers and individuals in the worst year for government debt since 2009. Yields are rising as the economy improves, the U.S. prepares to refinance a record $1.38 trillion next year, the budget deficit shrinks to the least since 2008, the Fed plans to reduce its stimulus and Congress battles Obama over raising the borrowing limit.
“Sovereign wealth funds and central banks are going to continue to have demand for Treasuries,” said James Sarni, senior managing partner in Los Angeles at Payden & Rygel, which manages $85 billion. “Despite the fact there’s widespread concerns that rates are going up, there’s still demand coming from individuals looking for income,” while institutions prize their safety and liquidity, said Sarni, who has been buying high-yield company bonds.