The government-bond market this week will have the chance to respond to the Federal Reserve’s Treasury buybacks unfettered by the effects of looming, hefty supply.
Last week, the Treasury offered $98 billion in new securities. This week, the issuance calendar goes quiet. And the Fed is scheduled to buy Treasury securities three times in the coming week under its plan to purchase as much as $300 billion in government debt over the next six months. That, plus Friday’s much-anticipated payrolls report, should make for a stronger week for U.S. government debt.
![[Fed's Purchasing to Weigh on Yields]](http://s.wsj.net/public/resources/images/MI-AV849_CRDLED_NS_20090329185714.gif)
Still, the market isn’t expected to break new ground, though yields should drift to the low end of their ranges.
This week "will be a rare week when the Fed is actually taking out supply, rather than the Treasury dumping in supply," said Chris Ahrens, an interest-rate strategist at UBS Securities. "The absence of supply combined with continued weak economic data and Fed buying will be supportive to Treasury prices."
Mr. Ahrens pointed to a range of 0.85% to 1.03% for the two-year yield, 2.50% to 3% for the 10-year and 3.40% to 3.75% for the long bond. Breaking out of those ranges to lower yields would require another step down in economic activity, Mr. Ahrens said, or better inflation numbers, which would spur buying of long-end Treasurys.
On Friday afternoon, the benchmark 10-year note was down 7/32 point, or $2.1875 per $1,000 face value, at 99 29/32. Its yield rose to 2.761% from 2.735% Thursday, as yields move inversely to prices. The 30-year bond was up 19/32 point to yield 3.617%.
Jim Sarni, a senior portfolio manager at Payden & Rygel in Los Angeles, noted that market participants are skeptical of making any longer-term investment decisions given the uncertainty surrounding possible new government policies to stimulate the economy. "Markets are in a very stagnant mood," he said.
This week, the data highlight will be Friday’s nonfarm-payrolls report, with economists looking for more weakness. Economists surveyed by Dow Jones Newswires expect the economy to have lost 671,000 jobs in March after losing 651,000 last month, and the jobless rate to rise to 8.5% from 8.1%. The week also offers another look at the U.S. manufacturing and services sector; both are expected to remain weak.
Mr. Ahrens also said he wouldn’t be surprised to see more investment-grade issuance in the coming week, given the stock market’s better tone, which could jostle Treasury prices. He noted a pattern of greater corporate issuance of late in weeks devoid of Treasury auctions. During periods of heavy corporate issuance, Treasurys come under pressure as banks hedge pending deals. When the deals price, though, Treasury prices tend to rise.
So far this year, Treasurys have lost 1.74% as of March 26, 2009, according to Barclays Capital U.S. Treasuries Index. Mortgage-backed securities, including fixed-rate and hybrid adustable-rate mortgages, on the other hand, are up 2.03%. Agencies are down 0.47%. Municipal bonds have gained 3.84% year-to-date, according to Barclays Municipal Bond Index. Barclays U.S. Corporate Index is down 2.22% year-to-date, and its high yield index is up by 5.98%.
Last week, the Fed bought a total of $15 billion Treasurys in the two-, three-, seven- and 10-year sectors. The first of this week’s buybacks, on Monday, will focus on longer-term Treasurys, those maturing from 2026 to 2039. Wednesday’s purchasing will be of debt maturing in 2012 to 2013, and Thursday’s will cover 2013 to 2016.
Investors will be focused on whether the Fed will buy mostly on-the-run securities, as it did last week, and how much it will dedicate to each issue. The goal of buying is to keep rates low and help the economy by coaxing consumer borrowing rates down.
WSJ