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Short-term Treasurys higher after FOMC minutes

January 07, 2010 | “MarketWatch"

SAN FRANCISCO (MarketWatch) -- Shorter-term Treasurys turned higher Wednesday, sending their yields lower, after minutes from the Federal Reserve's most recent rate-setting meeting showed officials clinging to the belief that the economic recovery would be gradual and inflation would remain tame.

Some members of the Federal Open Market Committee even supported more asset purchases to help the economy.

Yields on the 2-year Treasury note, which often reflect
expectations for Fed rate hikes, fell 3 basis points to 0.98%. They had risen for most of the session as prices fell.

TD Securities expects the Fed to maintain its key fed fund rate near zero until early 2011.

Yields on 1-year and 3-year Treasurys also slipped as prices turned higher.

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The VIX's decline to a 16-month low shows an absence of anxiety on Wall Street, reports's Bob O'Brien.

Although the November employment report was better than expected, Fed officials observed that "more than one good report would be needed to provide convincing evidence of recovery in the labor market."

Fed officials led by Chairman Ben Bernanke have said that economic conditions -- including a still-weak labor market -- meant the Fed would likely keep rates very low for an "extended period."

A few Fed officials pushed to expand the plan to buy mortgage-backed securities and only one thought it should be scaled back.

"All things considered, the takeaway from this report is that the FOMC appears to be quite open to maintain the current significant level of monetary stimulus as they nurse the U.S. economy back to health," said Millan Mulraine, economics strategist at TD Securities, in a note.

"Moreover, the open advocacy by some members to increase the level of stimulus, if needed in the future, suggests to us that the general sentiments of the committee remain quite dovish," he said.

The benchmark 10-year Treasury note (UST10Y 3.82, +0.06, +1.62%) stayed roughly at
levels before the afternoon release of Fed minutes. As prices fell, its yield rose 6 basis points to 3.818%. One basis point is equal to 1/100th of a percentage point.

Treasurys of all widely-traded maturities had slid ahead of the afternoon minutes, as investors sold government debt on expectations that an improving U.S. labor market would lessen demand for low-risk investments.

Private-sector firms in the U.S. eliminated 84,000 jobs in December, the 23rd decline in a row, according to the ADP employment report. The decline was slightly more than some economists had expected but a big improvement from November's loss, signaling the job market was slowly recovering, analysts said. Read more on private-sector employment.

"Generally, over the next 6 to 8 weeks, as people start revising gross-domestic-product numbers and as the jobs picture gets better, all signs are pointing to a better economy," said Thomas di Galoma, head of fixed income rates trading at Guggenheim Partners.

"Stronger economic data is a reason to reduce government bond exposure," he said.

He said a sell-off in U.K. government debt, known as gilts, also weighed on Treasurys.

The report comes ahead of Friday's official employment report, which includes nonprivate-sector jobs, from the Labor Department. Economists surveyed by MarketWatch are looking for payrolls to rise by 10,000, the first gain in two years.

Separately, the Institute for Supply Management said its nonmanufacturing index rose to 50.1% from 48.7% in November. Economists surveyed by MarketWatch were looking for the index to rise to 51.0%. But the ISM's closely watched employment index rose to 44.0% in December from 41.6% in November. See full story on ISM.

U.S. stocks struggled to post gains. The S&P 500 Index rose
0.6 points to end at 1,137, the Dow Jones Industrial Average gained 1.6 points to 10,573, and the Nasdaq Composite
Index slid 7 points to 2,301.

Treasurys rose Tuesday, sending yields lower, after the latest round of U.S. economic reports, including a plunge in pending-home sales and a bigger-than-expected gain in factory orders in November, did little to change expectations that the Federal Reserve will keep interest rates at ultra-low levels for some time

By Laura Mandaro & Nick Godt, MarketWatch


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