By Ellen Freilich
NEW YORK Jan 15 U.S. Treasuries prices rose on
Tuesday, drawing a safety bid from weaker stock prices and from
a prospective battle in Washington over the government's
borrowing limit, and support from large debt purchases by the
A refusal by Congress to raise the debt ceiling would raise
the risk that the United States would default on its debt by the
spring. Fed Chairman Ben Bernanke urged lawmakers on Monday to
lift the country's borrowing limit to avoid a debt default that
would put the economy at risk.
Weaker stock prices, as world stock markets stalled near
18-month highs, also fed the bid for safe-haven U.S. debt.
"There's a little bit of a risk off trade," said Thomas
Graff, fixed-income portfolio manager at Brown Advisory in
Baltimore, Maryland. "It looks like stocks are reacting
negatively to the wrangling over the U.S. debt ceiling so
Treasuries are higher."
The likelihood of the U.S. not raising the debt ceiling and
declaring default is "very low," Graff said.
"But a lack of resolution might result in the sequester
going through, which would be a bigger fiscal drag than is
priced in now; and if growth is slower, that's positive for
Treasuries," he said.
Benchmark 10-year notes rose 11/32, their yields
easing to 1.81 percent from 1.85 percent on Monday. Thirty-year
bonds rose 24/32, their yields easing to 3 percent
from 3.04 percent on Monday.
"We started the year with strength in risk assets and traded
off in Treasuries and now we're seeing a slow grind toward lower
yields as people take some risk off the table," said Matthew
Duch, portfolio manager at Bethesda, Maryland-based Calvert
Investments, with $12 billion in assets under management.
U.S. government data revealed that inflation on the
wholesale level was subdued in December, with prices excluding
food and energy rising just 0.1 percent, supportive for U.S.
Retail sales, however, were stronger-than-forecast in
December, a result that prompted some short-lived profit-taking
Bonds also got support when Fed Chairman Ben Bernanke, in a
question and answer session at the University of Michigan on
Monday, offered no sign that the Fed would curb its aggressive
bond purchases despite speculation - raised by the release of
minutes from the Fed's most recent policy meeting - that
purchases could end this year.
The Fed minutes led to a sharp selloff in the bond market.
Bernanke said the economy appeared to be responding to the
Fed's aggressive easing of monetary policy, but not as fast as
the central bank would like.
"The impression Bernanke left was a little more dovish than
what the initial reaction to the Fed minutes was," Graff said.
"That was probably purposeful on his part. He wanted to make
sure the minutes did not communicate the wrong message. We're a
good ways away from conditions where any monetary tightening
would be necessary."
The Fed has held interest rates near zero since December
2008 and last month decided to keep buying $85 billion worth of
Treasury bonds and mortgage-backed securities a month until it
saw a significant improvement in the labor market outlook.
"Bernanke talking about continued QE (quantitative easing)
helped Treasuries," Duch said. "He indicated that it was an
effective tool and that he still sees a need for it."
Duch said the Fed is trying to keep the monetary stimulus
pedal down to help the economy counteract contractionary
influences on the economy like the debt ceiling conflict, the
payroll tax cut expiring, and potential budget cuts.
"If there was any thought, based on the minutes of the last
Fed meeting, that the Fed would stop QE, Bernanke's comments
essentially told people not to jump to that conclusion," Duch
said. "As long as inflation is benign, Bernanke sees
quantitative easing as 'No harm, no foul.'"
On Tuesday, as part of its $45 billion monthly purchases of
government securities aimed to lower unemployment, the Fed
bought $0.927 billion in Treasury coupons with maturities
ranging from February 2023 to February 2031.