Longer-dated treasuries record best quarter since fourth quarter 2008

Longer-dated US Treasuries surged on Friday, propelling them to their best-performing quarter since late 2008, but analysts expect it could be tough for the market to eke out more gains despite fears about a US recession and the European debt crisis.
The start next week of the Federal Reserve's latest effort to help the sputtering US economy could extend the current rally in longer-dated bonds, but many traders and analysts said the move has largely been priced into the market.
The Fed's $400 billion bond program, known as "Operation Twist," involves the central bank selling its shorter-dated Treasuries and buying longer-dated ones in the open market. The 30-year US government bond led the market rally as its yield tumbled 1.48 percentage points - the steepest drop since a 1.63-percentage-point decline during the height of the world-wide credit crunch in the last quarter of 2008.
The 30-year bond rebounded from a sell-off earlier this week on hopes that European leaders would contain the region's debt crisis and economic data that were not as dire as some traders had feared. The European response to the debt crisis, while progressing, "is too slow for the market to remain calm. In addition, there are growth worries about the US This is the cocktail driving markets in the quarter," said Thanos Bardas, portfolio manager at Neuberger Berman in Chicago, which oversees nearly $200 billion in assets.
The dramatic gains in Treasuries came at the expense of equities and other risky assets, as investors flocked into cash, Treasuries, German Bunds and perceived safe-haven investments. Wall Street stocks recorded their worst quarter since last quarter of 2008.
The 30-year bond finished up 3-13/32 in price for a yield of 2.90 percent, down 16 basis points from Thursday. A week ago, the 30-year yield touched 2.739 percent, its lowest level since January 2009. US benchmark 10-year Treasury notes ended up 28/32 in price to yield 1.91 percent, down 10 basis points from Thursday. A week ago, the 10-year yield touched 1.674 percent - the lowest level seen in at least 60 years.
"I expect Treasuries will hold their value because of the uncertainty over Europe," said Anthony Valeri, fixed-income strategist with LPL Financial in San Diego, which oversees $280 billion in assets. Bond trading was much heavier than usual with volume 27 percent above its five-day average and 37 percent above its 30-day average, according to Tradeweb.
As financial turmoil in Europe threatens an already fragile US economy, the Fed revived Operation Twist, which was first used in the early 1960s. The program of twisting longer yields lower is intended to revive borrowing and investment, whose recent slowdown has concerned Fed policymakers.
The New York Federal Reserve, which will conduct the operation, said on Friday it would sell $44 billion in short-dated Treasuries from its portfolio and buy the same amount of longer-dated issues in the open market in October. Fed purchases will now absorb most new long-maturity debt supply, with only around $3 billion to be left out of $42 billion sold per quarter, according to TD Securities.
"At this point with interest rates near zero, any kind of stimulus with interest rates, its impact will be on the margin," Neuberger's Bardas said. "Treasuries are all about momentum right now. They offer minimum long-term value. For extra juice in Treasuries, you need a big drop in stocks," he added. Despite doubts among investors, several Fed officials said in recent days that the US central bank has more tools to help the economy. "Should economic performance deteriorate, monetary policy will respond," St. Louis Fed President James Bullard said at an event in San Diego on Friday. "The Fed is not now, or ever, 'out of ammunition.'"