Treasuries fall before U.S. auctions $32 billion in 3-year notes

Inflow ‘Wave’

“There are enough people on the front end willing to be long,” Roth of Mitsubishi UFJ said, referring to bets that shorter-term securities will gain. “Everyone thinks the expiration of the TAG program will cause a wave of inflows.”

The FDIC’s expanded deposit insurance is part of the Transaction Account Guarantee Program, known as TAG. An emergency 2008 government provision providing unlimited insurance on certain bank accounts during the U.S. financial crisis to help prevent sudden withdrawals will expire at the end of the year unless Congress extends it.

There’s about $1.4 trillion sitting in banks’ non-interest- bearing transactions accounts that hold more than $250,000, the previous insurance ceiling, FDIC data show. It will become uninsured in January if Congress doesn’t act.

The Treasury is scheduled to auction $21 billion of 10-year notes tomorrow and $13 billion of 30-year bonds Dec. 13.

Volatility in Treasuries traded close to the lowest level since 1988. Bank of America Merrill Lynch’s MOVE index, which measures price swings based on options, was at 52.2 basis points yesterday, up from the 51 basis points reached on Dec. 3. It has averaged 71 basis points in 2012. Volatility reached 265 basis points in October 2008 as the financial crisis intensified.

Fed Meeting

The Fed will announce tomorrow after a two-day meeting that it will begin buying $45 billion in Treasuries each month, pushing its balance sheet almost to $4 trillion, according to a Bloomberg survey of economists.

Forty-eight of 49 economists predict the Federal Open Market Committee will purchase the securities to bolster an existing program to buy $40 billion in mortgage bonds each month. Policy makers pledged in October to continue that plan until the labor market improves “substantially.”

A program known as Operation Twist, in which the Fed sells shorter-maturity Treasuries and buys longer-dated debt, is due to expire at the end of the month. As part of the plan, the central bank will buy as much as $1.5 billion today of TIPS due from January 2019 to February 2042.

The Fed bought $2.3 trillion of assets from 2008 to 2011 in two rounds of the stimulus strategy called quantitative easing.

“The market is still expecting something” from the Fed, said Michael Leister, a fixed-income strategist at Commerzbank AG in London. “When we maybe look at things like the labor market and other measures we don’t really see a substantial improvement, so these further easing fantasies are there.”

Treasuries declined earlier as the ZEW Center for European Economic Research said its index of German investor and analyst expectations, which is designed to predict economic developments six months in advance, climbed to 6.9 this month from minus 15.7 in November. Economists in a Bloomberg survey predicted a gain to negative 11.5.

Bloomberg News

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