Aug. 20 (Bloomberg) -- 30-year U.S. Treasury bonds gained after the European Central Bank said it hasn’t discussed any plan to target bond yields of euro-bloc members, reinforcing concern leaders will fail to curb the region’s debt crisis.
Long bonds fell earlier, pushing yields to almost the highest since May, after Germany’s "Der Spiegel" magazine reported the ECB is considering putting a cap on euro-area bond yields to contain the region’s financial turmoil, damping safety demand. The Federal Reserve bought $4.47 billion of Treasuries today as part of a program to support the economy.
“There are still uncertainties out there,” said Justin Lederer, an interest-rate strategist at Cantor Fitzgerald LP in New York, one of 21 primary dealers that trade with the Fed. “There’s been no distinctive action” on the crisis.
Thirty-year bond yields decreased two basis points, or 0.02 percentage point, to 2.91 percent at 11:29 a.m. in New York, according to Bloomberg Bond Trader prices. They climbed earlier to 2.981 percent, after touching 2.984 percent on Aug. 16, the highest since May 14. The price of the 2.75 percent security maturing in August 2042 rose 11/32, or $3.44 per $1,000 face amount, to 96 3/4.
Treasury 10-year note yields declined one basis point to 1.80 percent after increasing earlier to 1.86 percent.
Investors in Treasuries lost 1.5 percent in August, according to Bank of America Merrill Lynch indexes. The last time they fell as much in a month was December 2010.
Less Expensive
The term premium, a model created by economists at the Fed that includes expectations for interest rates, growth and inflation, was negative 0.74 percent today, the most expensive in almost a week. The average this year of negative 0.72 percent. The premium was negative 1.02 percent on July 24, the most expensive ever. A negative reading indicates investors are willing to accept yields below what’s considered fair value.
The ECB may decide at its next meeting to set yield limits on the debt of European countries, Der Spiegel reported yesterday, without saying where it got the information. A plan to set a target on bond yields would involve the bank using its power to print money, the German news magazine said.
Treasuries erased losses after the bank said the matter hasn’t been discussed by policy makers.
“The ECB is saying it’s not a done deal that they are going to cap yields,” said Jeffry Feigenwinter, head of Treasury trading in New York at the primary dealer Societe Generale SA.
A spokesman for the European bank said in an e-mail it’s “absolutely misleading to report on decisions” that haven’t been made and individual views that haven’t been discussed by the ECB’s Governing Council.
“As far as recent statements by government officials are concerned, it is also wrong to speculate on the shape of future ECB interventions,” the spokesman said. “Monetary policy is independent and undertaken strictly within the ECB mandate.”
Germany’s Bundesbank stepped up its criticism of the ECB’s plan to embark on potentially “unlimited” government bond buying. The purchases “entail significant stability risks,” the Frankfurt-based central bank said in its monthly report.
Demand for safety also declined earlier before U.S. reports this week that may show the recovery of the world’s biggest economy is gaining momentum.
Existing home sales rose 3.2 percent in July from June, when they dropped 5.4 percent, according to a Bloomberg survey before the National Association of Realtors’ report on Aug. 22. Sales of new homes, due the next day from the Commerce Department, rose 4.3 percent in July, a separate survey showed. Orders for durable goods increased 2.5 percent in July, another survey said Commerce Department data on Aug. 24 will show.
Rate Bets
The odds the Fed will take steps to support the economy at its Sept. 12-13 meeting are falling, according to Morgan Stanley and Credit Suisse Group AG.
The chance of any Fed action next month has fallen to 30 percent from 40 percent, according to an Aug. 17 report by Matthew Hornbach, head of U.S. interest-rate strategy at Morgan Stanley in New York, a primary dealer. If policy makers do anything, it will be to extend their outlook for the Fed’s main interest rate to 2015 from 2014, Hornbach wrote.
The probability of another large-scale asset-purchase program is 50 percent at most, Neal Soss and Dana Saporta, economists at the primary dealer Credit Suisse Group AG, wrote in a note yesterday.
The difference in yields between 10-year notes and Treasury Inflation Protected Securities, which represents traders’ expectations for the rate of inflation over the life of the securities and is known as the break-even rate, was 2.25 percentage points. It touched 2.34 percentage points on Aug. 9, the highest since April.
The U.S. central bank bought $2.3 trillion of mortgage and Treasury debt from 2008 to 2011 in two rounds of a stimulus strategy called quantitative easing.
The Fed is now swapping shorter-term Treasuries in its holdings with those due in six to 30 years to put downward pressure on long-term borrowing costs. It purchased $4.47 billion of Treasuries today due from August 2018 to August 2020.
The gap between U.S. bank deposits and loans is growing at the fastest pace in two years, providing lenders with funds to buy bonds.
Record Difference
As deposits increased 3.3 percent to $8.88 trillion in the two months ended July 31, business lending rose 0.7 percent to $7.11 trillion, Fed data show. The record gap of $1.77 trillion has expanded 15 percent since May, the biggest similar-period gain since July, 2010.
Banks already bought $136.4 billion in Treasury and government agency debt this year, more than double the $62.6 billion in all of 2011, pushing their holdings to an all-time high of $1.84 trillion.
“Bank deposits continue to explode and in turn they continue to buy Treasuries,” said Michael Mata, a money manager in Atlanta at ING Investment Management Americas, which oversees about $160 billion.
