September 10, 2012 / 1:10 PM / 5 years ago

TREASURIES-Long-dated prices fall as QE3 hopes spur inflation fears

By Karen Brettell
    NEW YORK, Sept 10 (Reuters) - Long-dated U.S. Treasuries
prices fell on Monday, and thirty-year bonds underperformed, as
investors bet that a third bond purchase program in the United
States would stoke higher inflation expectations.
    The Federal Reserve is seen as likely to launch a new
quantitative easing program when it meets later this week, as
the central bank struggles with a sluggish U.S. economy with a
stubbornly high jobless rate.
    Treasuries initially rallied strongly on Friday as a weaker-
than-expected payrolls report boosted bets of further stimulus.
They have since given back ground as investors focus on
potential price pressures from any new program.
    "Of the possible consequences of what the Fed could do, the
market is focusing only on the most negative one. The prospect
of increasing inflation expectations," said Jim Vogel, interest
rate strategist at FTN Financial in Memphis, Tennessee.
    Intermediate-dated Treasuries have been among the best
performers on expectations that the Fed would extend purchases
to mortgage-backed securities with maturities of around five
    Five-year Treasuries yields rose back to 0.65
percent, after falling as low as 0.60 percent on Friday. 
    Breakeven levels on five-year Treasury Inflation-Protected
Securities, which measure expected inflation, increased to 2.02
percent on Monday, the highest since early May, and up from 1.98
percent on Thursday.
    Benchmark 10-year Treasuries yields rose to 1.68
percent on Friday, up from a low of 1.59 percent on Friday.
    Thirty-year bonds yields, which are bearing the
brunt of inflation fears, increased to 2.85 percent, up from a
low of 2.71 percent on Friday.
    The yield gap between 10-year notes and 30-year bonds also
expanded to 118 basis points on Monday, out from 112 basis
points on Thursday and the widest level since mid-May.
    The spread between five-year notes and 30-year bond yields
widened to 221 basis points, from  212 basis points on Thursday
and also the widest level since mid-May.
    New Treasury supply of $66 billion scheduled for this week
is also weighing on debt prices. 
    Some investors are concerned with the timing of the sale of
$13 billion in new 30-year bonds, which will be auctioned on
Thursday just before the Fed gives the statement from its
two-day meeting.
    This week's sales will also include $32 billion in
three-year notes on Tuesday and $21 billion in 10-year notes on
    Expectations of further Fed action have increased since
Chairman Ben Bernanke said in a speech at Jackson Hole, Wyoming
last Friday that high unemployment is a "grave concern," and
that the central bank would act as needed to strengthen the
economic recovery.
    The Federal Reserve will purchase up to $1.5 billion in
longer-dated Treasury Inflation-Protected Securities due between
2019 and 2042 on Monday as part of its Operation Twist program,
designed to lower long-term borrowing rates.
    Other closely watched events will include a ruling by
Germany's Constitutional Court on Wednesday on whether the euro
zone's permanent bailout fund is compatible with German law, a
vital condition for it to come into force.
    The Netherlands will hold elections the same day.
0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below