Brian Edmonds Comments: Treasurys Rise on Durable Goods; 10-Yr Yield Hits 19-Month Low
August 25, 2010, The Wall Street Journal
Treasurys rose Wednesday, pushing the benchmark 10-year note yield to a 19-month low, as a disappointing durable goods report bolstered demand for safe assets.
At the peak of the buying, the 10-year note yield touched 2.418%, the lowest level since Jan. 21, 2009. The 30-year bond's yield hit 3.461%, the weakest level since March 18, 2009.
The report showed a meager 0.3% gain in durable goods, much less than 2.8% increase forecast by economists, adding to anxiety about the economic outlook. The bond market extended Tuesday's rally which was fueled by a 27% plunge in the U.S. existing home sales report.
"Economic fundamentals are poor and Treasurys are in high demand despite low yields," said Brian Edmonds, head of interest rates at Cantor Fitzgerald LP in New York. "Right now, people focus on return of capital rather than return on capital."
As of 9:27 a.m., EDT, the benchmark 10-year Treasury note was 12/32 higher, and its yield was down 4 basis points to 2.449%. The 30-year bond was 1 7/32 higher and its yield was down 6.4 basis points to 3.500%. Bond prices move inversely to yields.
The 30-year Treasury bond was the best performer as investors grabbed for yield in the longest maturity of the bond market, where bond yields have plunged in recent months. The yield premium of the benchmark 10-year note over the two-year note dropped below 200 basis points for the first time since April 2009.
A credit rating cut on Ireland's government bonds overnight also added to the economic worries. Concern about the euro zone's fiscal problems and its banking system has risen again in recent weeks. Ireland's sovereign credit rating was cut by the Standard & Poor's to AA negative from AA with a negative outlook, citing higher cost of the government to shore up the country's banking system.
Treasury yields have tumbled over the past few months as concerns have grown that the economic recovery will lose traction in the second half of the year, when most of the fiscal stimulus fades. The yield on the 10-year note, the benchmark for consumer and corporate borrowing, has plunged more than 150 basis points after briefly rising above 4% in early April.
"The risk of double dip recession increases," said Kenneth Broux, market economist at Lloyds Banking Group in London. "The Federal Reserve is likely to consider buying more Treasurys to support the economy, which means lower yields."
The Fed last year bought $300 billion in Treasurys, part of the $1.725 trillion asset-buying program that ended in March. The central bank started buying Treasurys last week, using proceeds from its maturing mortgage-backed securities, in an attempt to push down long-dated interest rates and spur economic growth. Tuesday, the Fed bought $1.35 billion in Treasurys maturing between Feb. 2013 and July 2014.
Concern about the economy is likely to continue to support Treasury auctions. The Treasury Department is scheduled to sell $36 billion in five-year notes at 1 p.m., EDT, followed by $29 billion in seven-year notes Thursday.
Tuesday, the Treasury sold $37 billion two-year notes at the lowest yield ever for the maturity. The auctioned yield was 0.498%, allowing the U.S. government to continue to borrow at historically low interest rates to fund its budget shortfall well over $1 trillion.
