Treasury yields decline

US Treasury debt yields fell on Monday as investors focused on whether Federal Reserve Chairman Ben Bernanke will hint at a third debt purchase programme when he speaks at the end of the week. Investors are awaiting Bernanke's highly anticipated speech on Friday in Jackson Hole, Wyoming. He has used this event the previous two years to flag the Fed's intention on more easing.
Expectations that the Fed will announce a third round of quantitative easing, known as QE3, have increased since minutes from the central bank's August meeting, released last week, showed that Fed action might be imminent unless the economy showed significant improvement.
"Everybody is looking ahead to Friday's speech from Fed Chairman Bernanke - we will see if the market is disappointed or not," said Mary Ann Hurley, vice president of fixed-income trading at D.A. Davidson & Co in Seattle. Speculation the Fed will move ahead with more economic stimulus put a bid into Treasuries on Monday in slow, late-summer trade, with US benchmark 10-year Treasury notes gaining 12/32 in price to yield 1.65 percent, down from 1.69 percent late Friday.
Benchmark yields have fallen from three-month highs of 1.86 percent early last week, the 200-day moving average and a level where there is a fair amount of buying support for the debt. "After the minutes last week there is a pretty good assumption that Bernanke will allude to some sort of QE3," said Jason Rogan, director of Treasuries trading at Guggenheim Partners in New York. "If he doesn't talk about QE3, that would presumably disappoint the markets," Rogan added.
If Bernanke does not hint at new bond purchases, bond yields could climb back to recent yield support levels, said Rogan. A gloomy assessment of the business climate in Germany set an early tone of bidding for safe-haven US bonds. Business sentiment dropped for a fourth month in a row as the euro zone crisis and a slowdown in China took their toll.
Markets have also been unsettled by rising talk of a Greek euro zone exit, after a conservative ally of German leader Angela Merkel said the country should leave the currency bloc by next year. The Fed also bought $1.83 billion in Treasuries due between February 2036 and August 2042 on Monday as part of its Operation Twist program designed to lower long-term borrowing rates.
The Treasury this will week sell $99 billion in new coupon-bearing debt, comprising $35 billion in two-year notes on Tuesday, $35 billion in five-year notes on Wednesday and $29 billion in seven-year notes on Thursday. Thirty-year bonds on Monday traded 27/32 higher in price to yield 2.76 percent, down from 2.80 percent late Friday.