Fed Sees U.S. recovery Gaining Momentum


5 January 2011

Treasuries were little changed after minutes of the Federal Reserve’s last meeting showed policy makers said economic growth was improving.

U.S. five-year notes earlier led an advance as traders speculated underwriters will repurchase Treasuries used to hedge against moves in interest rates after completing corporate debt sales. Fed minutes showed officials felt economic gains were “not sufficient” to scale back their plans to buy $600 billion in U.S. debt to spur employment in the second round in a stimulus strategy called quantitative easing.

“In general Fed policy makers think the economic recovery is gaining a little bit of momentum, although the pace is a little bit slow,” said Alex Li, an interest-rate strategist in New York at Deutsche Bank AG, one of the 18 primary dealers that trade with the central bank. “There are certainly some concerns about the economy gaining momentum — concerns from Treasury investors. That added a bearish tone to the Treasuries market.”

Five-year note yields rose one basis point, or 0.01 percentage point, to 2.01 percent at 5:06 p.m. in New York, according to BGCantor Market Data. They earlier rose to 2.04 percent and fell to 1.95 percent. The price of the 2.125 percent security maturing in December 2015 fell 1/32, or 31 cents per $1,000 face value, to 100 18/32.

Ten-year note yields were little changed at 3.33 percent after rising to 3.37 percent and falling to 3.30 percent.

FOMC Minutes

The minutes of the Dec. 14 Federal Open Market Committee meeting, released today, showed with growth picking up since the asset buys began, Fed officials remain focused on an inflation rate that is lower than the roughly 2 percent that the central bank prefers and an unemployment rate that will fall slowly, averaging 9.4 percent this year according to a Bloomberg survey.

“The Fed will have to see good growth for more than a one- or two-month period to alter their views on QE2,” said Charles Comiskey, head of Treasury trading at Bank of Nova Scotia in New York. “They have a high threshold.”

The U.S. added 140,000 jobs in December, after a rise of 39,000 in November, according to the median forecast in a Bloomberg News survey of 74 economists before the Labor Department reports the data on Jan. 7.

Orders at U.S. manufacturers unexpectedly rose 0.7 percent in November, after a 0.9 percent decrease in October, data from the Commerce Department showed today. Economists in a Bloomberg survey forecast a 0.1 percent drop.

Note, Bond Auctions

The Treasury will auction $66 billion of 3-, 10- and 30- year notes and bonds next week, an amount unchanged from the last sales of the maturities amid prospects for a rising budget deficit, according to the median forecast of the Fed’s primary dealers. It will sell $32 billion in 3-year debt, $21 billion in 10-year notes and $13 billion in 30-year bonds, the same as in the last round, they estimated.

The U.S. had scaled back auction sizes after earlier expanding debt sales to finance annual budget deficits exceeding $1 trillion. It sold $74 billion in 3-, 10- and 30-year debt in January 2010, gradually reducing the size of the offerings to $66 billion at the last sale in December. The Treasury Department will announce the amounts on Jan. 6.

The $858 billion bill President Barack Obama signed Dec. 17 extending tax cuts for two years spurred speculation federal borrowing will need to stay stable or increase.

The Fed is buying U.S. debt every day this week in the quantitative easing program. It purchased $1.62 billion today of Treasury Inflation Protected Securities maturing from July 2012 to February 2040.

First Round

In the central bank’s first round of asset purchases, which ended in March, it acquired $1.75 trillion in securities, including $300 billion in Treasuries. The Fed announced Nov. 3 the plan to buy an additional $600 billion through June.

Companies from Deutsche Bank AG, Germany’s biggest bank, to the funding arm of General Electric Co. sold about $19 billion of debt today in the biggest day of bond offerings since Sept. 8 when issuance was about $20 billion, according to data compiled by Bloomberg. That was the busiest day of sales in 2010, the data show.

General Electric Capital Corp. sold $6 billion of bonds in four parts, the biggest issue since Feb. 4, when Berkshire Hathaway Inc. raised $8 billion through a debt offering and Kraft Foods Inc. raised $9.5 billion, the data show.

As corporations sell debt, they may enter so-called rate lock agreements, in which they bet on Treasury prices declining to guard against higher yields. Once the debt is sold, the wagers are ended.