US Treasuries yields fell to their lowest in three months on Wednesday, prompted by more bets that the Federal Reserve will not pare its bond purchase stimulus until next year in the aftermath of a disappointing jobs report on Tuesday. Buying overnight helped yields fall further, after a rally on Tuesday and no major data releases scheduled on Wednesday. The government is catching up on delayed economic data after the government's 16-day partial shutdown ended a week ago.
Market focus is now largely centred on next week's Fed policy meeting, where the US central bank is expected to keep its $85 billion a month bond purchase program unchanged. "The Fed is kind of handcuffed from doing any tapering, the consensus is pushing it out to March. The weak (jobs) number supports it," said Sean Murphy, a Treasuries trader at Societe Generale in New York.
A Reuters poll conducted on Tuesday showed 9 of 15 US primary dealers see the Fed starting to reduce bond purchases in March, with many of them blaming Washington's fiscal impasse for a "significant" impact on the Fed's timing. Data over the coming months is likely to be skewed by the effects of the government shutdown, limiting insight into the actual state of the economy and to what degree the shutdown and the fight over raising the debt ceiling may have harmed growth.
"Now you have the threat of slower growth. We have to see how much economic damage has been done by the government shutdown," said Jeffrey Rosenberg, chief investment strategist for fixed income at BlackRock in New York, which manages $3.79 trillion in assets. Some economists forecast the first partial government shutdown in 17 years likely shaved about 0.4 percentage point from the gross domestic product in the fourth quarter. The yield difference between two-year and 10-year Treasury yields, which measures investors' growth expectations on the United States, narrowed to 2.18 percent, the tightest level since July 22, according to Reuters data. On average trading volume, benchmark 10-year notes were last up 7/32 in price to yield 2.485 percent, the lowest since July 23. The yields have fallen from 3.00 percent on September 5, before the Fed surprised investors by keeping the size of its bond purchase program unchanged. They have retraced about half of their increase in reaction
to Fed Chairman Ben Bernanke hinting, back in May, the Fed might reduce its bond purchases by late this year. "We are at the precipice of pricing out the May/June tapering talk," Rosenberg said. The pullback in yields was also seen in Treasury Inflation-Protected Securities. The government will add $7 billion to a 30-year TIPS issue originally issued in February at an auction on Thursday. Traders expected the reopened 30-year TIPS supply to fetch a yield of 1.331 percent. On Wednesday, the Fed bought $3.15 billion in notes due 2021 to 2023 on Wednesday as part of its ongoing purchase program.
As for other central bank operations, the Fed borrowed the most from banks and money market funds in more than three weeks during the test of its fixed-rate, reverse repurchase agreement program on Wednesday. Under the program aimed to reduce cash in the financial system and to achieve its interest rate objectives, the Fed borrows cash typically overnight at a fixed interest rate and backs the loans with the securities it owns. On Wednesday, banks and money funds lent $15.74 billion to the Fed via overnight reverse repos at a 0.02 percent interest rate. This was the most since $58.16 billion on September 30.