U.S. yields at almost 2-month lows as Fed may buy more bonds

Treasuries 10-year note yields traded close to two-month lows as Federal Reserve policy makers said the central bank may need to increase bond purchases next year to boost the economic recovery.

The benchmark note rallied for the fifth straight day as President Barack Obama said the U.S. can’t afford to extend Bush tax cuts for the wealthy as lawmakers seek to address the budget deficit and avoid the so-called fiscal cliff. The difference between the yield on the two-year note and the 10-year security narrowed to almost the least in two months.

“Yields are not all that attractive, but bonds continue to be a relative safe haven,” said Brian Edmonds, head of interest rates at Cantor Fitzgerald LP, in New York one of 21 primary dealers that trade with the Fed. “The stock market is probably nervous about the fiscal cliff. What will probably happen is that we’ll kick the can down the road.”

The benchmark 10-year yield was little changed at 1.59 percent at 3:24 p.m. in New York, according to Bloomberg Bond Trader prices. The 1.625 percent note due in November 2022 traded at 100 10/32. The yield dropped to 1.57 percent yesterday, the lowest level since Sept. 5. It climbed as high as 1.63 percent today.

Range Trade

“There’s not enough motivation to break us through to a lower-yield range,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “We’ve reached a zone where the Treasury market is consolidating.”

The so-called yield curve measuring the gap between yields on two- and 10-year debt widened to 1.34 percentage points, after dropping to 1.32 percentage points yesterday. It steepened to a 2012 high of 2 percentage points in March.

A yield curve plots the rates of bonds of the same quality, but different maturities. It steepens when yields on shorter- maturity notes fall, those on longer-dated bonds rise, or both happen simultaneously.

In minutes released today, a number of Fed officials said the central bank may need to expand its monthly purchases of bonds next year after the expiration of Operation Twist in December.

Fed Views

“A number of participants indicated that additional asset purchases would likely be appropriate next year after the conclusion of the maturity-extension program,” according to the record of the Federal Open Market Committee’s Oct. 23-24 gathering released today in Washington.

“Everyone expected there was a significant chance we would get more QE,” Cantor Fitzgerald’s Edmonds said. “We have the FOMC continuing to buy bonds.”

The Fed is swapping short-term Treasuries in its holdings with those due in six to 30 years to put downward pressure on borrowing costs. The central bank sold $7.67 billion of securities due from May 2015 to June 2015 today, according to the Fed Bank of New York’s website.

The minutes also show a detailed discussion about whether the central bank should link its policy of holding the main interest rate at zero to numerical measurements of unemployment and inflation, an approach that participants “generally favored” over the current approach of specifying a calendar date through which rates will remain low.

The Standard & Poor’s 500 dropped 0.7 percent today. It has fallen 4.5 percent since Obama was re-elected.

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