US government debt prices rose on Thursday as traders bet on more stimulus from the Federal Reserve, after minutes from its last policy meeting showed that action might be imminent in a bid to reduce unemployment. Weaker Chinese factory data and worries about Greece's and Spain's finances also spurred safe-haven bids for bonds.
The minutes from the Fed's August meeting released on Wednesday showed the US central bank's policy-setting group is prepared to deliver another round of monetary stimulus "fairly soon" unless the economy strengthens significantly. "Yesterday's minutes definitely caught some people off guard. I don't think people expected as dovish a statement as we got," said Justin Lederer, interest rate strategist at Cantor Fitzgerald in New York.
US government bond yields have risen dramatically over the past month, as improving data on employment, housing and manufacturing led investors to reduce expectations that the Fed would launch a third round of bond purchases when it meets in September. The minutes from the Fed's August meeting, which preceded the most recent data, have now led investors to re-evaluate this stance as the economy, while improving, remains sluggish.
"It still doesn't equate to the type of growth that the Fed officials are looking for, it wasn't robust numbers," Lederer said. Benchmark 10-year notes yields declined on Thursday to 1.67 percent, down from a three-month high of 1.86 percent on Tuesday. The yields have increased from a record low of 1.38 percent on July 25.
"The recent selloff got a little ahead of itself," said Andrew Richman, fixed income strategist at SunTrust Private Wealth Management in Palm Beach, Florida. If the Fed does launch a new stimulus program it is seen as most likely acting in September, or waiting until after November's election. There is dissent among Fed officials over the need for further easing, however. St. Louis Federal Reserve President James Bullard told CNBC television that the US economy, although far from robust, does not need further Fed stimulus.
"Going along at this slow pace is not enough to justify gigantic action," he said. Traders are now waiting to see whether Fed Chairman Ben Bernanke will signal that the central bank is moving closer to implementing QE3 in his speech at an event in Jackson Hole, Wyoming next week. Bernanke has used this event the previous two years to flag the Fed's intention on more easing.