US Treasuries prices jumped on Thursday after the European Central Bank offered no bold plan to shore up the euro zone's banking system and the finances of weaker eurozone members, rekindling bids for low-risk government debt. ECB President Mario Draghi said on Thursday the bank would gear up to buy Italian and Spanish bonds in the open market, but only after euro zone governments have activated bailout funds to do the same.
Draghi had raised hopes for an aggressive scheme from the ECB last Friday when he vowed the ECB would do whatever was necessary to prevent a euro zone collapse. "The ECB just failed to live up to expectations that were built up last week. It's all talk and no action from the ECB," said Guy LeBas, chief fixed income strategist with Janney Montgomery Scott in Philadelphia.
It was a second straight day that a major central bank disappointed investors who had bet on more stimulus. On Wednesday, the US Federal Reserve said it is prepared to act if the economy deteriorates further. But it refrained from embarking on a third round of bond purchases, dubbed QE3, or extending its pledge of near-zero interest rates beyond into 2015.
The US central bank, economists say, is buying time to lay the groundwork for further monetary easing possibly at its next policy meeting, on September 12 to 13. Fed policy-makers are watching for more evidence that the slowing in the US economy since the first quarter is not temporary. They signalled in their policy statement on Wednesday that the economy needs more help, but are cognisant that each round of monetary stimulus provides less bang for the buck, analysts said.
"When interest rates are already so low, more policy accommodation is ineffectual," said Komal Sri-Kumar, chief global strategist at TCW Group in Los Angeles, which has $127 billion in assets under management. Stubbornly high unemployment, which stood at 8.2 percent in June, has been a source of disappointment to the Fed and to economists. Investors are awaiting the government's monthly payrolls report for July at 8:30 am (1230 GMT) on Friday, which economists expect will show 100,000 jobs were added, half the level seen required to lower the jobless rate.
With the likelihood of more central bank action in the foreseeable future to counter further economic weakness in Europe and the United States, investors embraced the perceived safety of US and German government debt. In heavy, volatile trading, the benchmark 10-year Treasury note was last 11/32 higher in price at 102-13/32. The 10-year yield fell nearly 4 basis points at 1.485 percent, roughly 10 basis points above the record low set last week.
The 30-year bond was up 30/32 at 109-7/32, recouping all of Wednesday's drop. The 30-year yield was about 5 basis points lower on the day at 2.550 percent and 11 basis points above the record low set a week ago. US Treasuries lagged German Bunds in the scramble for safe-haven bonds. The yield premium on 10-year Treasuries above 10-year Bunds grew to 19.9 basis points, up 7 basis points from late on Wednesday and the highest level in over a week.
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