US Treasuries gained in price on Thursday as stocks retreated and investors focused on whether Federal Reserve Chairman Ben Bernanke will hint at a third round of bond purchases when he speaks on Friday. Weighing the likelihood of the Fed launching new stimulus when it meets next month has been the predominant trade over the past few weeks.
Bernanke will speak at a symposium of central bankers in Jackson Hole, Wyoming, the same event where he hinted at the Fed's second round of easing in 2010. Thursday's price strength, considering the Treasury was auctioning $29 billion of seven-year notes, "indicates to us that people are bullishly positioned for Jackson Hole, but are already fairly close to their target allocations for this meeting," said George Goncalves, head of US interest rates strategy at Nomura Securities International in New York.
"To us, this indicates that price action from any Bernanke disappointment may be very unpleasant, though betting for a Bernanke disappointment has not generally been a profitable strategy," Goncalves said. Atlanta Fed President Dennis Lockhart told CNBC on Thursday that it will be a "close call" when Fed policymakers meet next month to decide on new easing.
Improving US economic data in early August had led some investors to discount the likelihood of further stimulus being introduced in the near term. Others, however, say the jobless rate is still too high and growth too sluggish, making it more likely that the Fed will act. "It depends on whether or not you think you're going to walk away tomorrow with a little bit of disappointment in Bernanke if he doesn't announce anything," said Sean Murphy, a Treasuries trader at Societe Generale in New York.
"I don't think that because you don't hear an official launch from Bernanke tomorrow that QE3 is off the table for September," he added. There has also been speculation the Fed might turn to purchases of mortgage-backed debt, and away from Treasuries, in any new program. With US government debt yields and mortgage rates near record lows, however, some investors also question how much impact additional easing may have.
"It would have marginal effects on the economy. A lot of people have already refinanced. I don't think it's going to offer as much bang for the buck as it has in the past," said Mirko Mikelic, portfolio manager at Fifth Third Asset Management in Grand Rapids, Michigan. Benchmark 10-year notes traded 9/32 higher in price to yield 1.63 percent, down from 1.65 percent late Wednesday. The notes have rallied from a yield of 1.86 percent at the beginning of last week, but overall in August the notes are on track for the biggest monthly gain in yield since March.
Data on Thursday showed that the number of Americans filing new claims for jobless benefits was unchanged last week, which was higher than expectations. Separately, personal spending rose by 0.4 percent in July to the highest since February 2012, and personal income rose by 0.3 percent in the month. The Treasury's sale of seven-year notes on Thursday was the final auction in this week's $99 billion of new supply. The Treasury sold $35 billion of two-year notes on Tuesday and $35 billion of five-year notes on Wednesday. The Federal Reserve purchased $1.83 billion in bonds due between 2036 and 2042 on Thursday as part of its Operation Twist program, which is designed to lower long-term rates.