NEW YORK: US Treasury debt prices rose on Tuesday as Federal Reserve officials were set to begin a two-day policy meeting amid expectations that more central bank action to help foster economic growth could emerge in coming weeks.
Two interpretations of the market action were cited.
One was that the possibility of further purchases - or other accommodative steps - by the Fed was supportive for Treasuries and mortgage-backed securities.
"With the Fed meeting today and tomorrow and the ECB meeting on Thursday, traders are looking for potential signs of bond purchase programs sometime later this summer. That's supporting the bond market right now," said Gary Thayer, chief macro strategist at Wells Fargo Advisors in St. Louis, Missouri.
The other explanation was more closely tied to the European Central Bank. That interpretation noted that safe-haven US Treasuries sold off late last week when ECB President Mario Draghi spoke forcefully about preserving the euro, pronouncements that rallied riskier assets such as stocks and the sovereign debt of nations at Europe's geographic periphery.
More wary views of other European officials followed, however, curbing market confidence that the ECB could deliver decisive anti-crisis measures at its meeting this week. That put the break on the stock market's rise and revived Treasuries. The premium investors demanded to hold Spanish and Italian 10-year bonds, rather than German Bunds, also widened.
The Spanish/German 10-year government bond yield spread was last 22 basis points wider on the day at 550 basis points, while the equivalent Italian spread was 20 basis points wider at 484 basis points after German officials repeated their opposition to giving the euro zone's ESM rescue fund a banking license, cooling the positive tone set last week by ECB President Mario Draghi.
"Ten-year yields popped up and Treasuries sold off on Draghi's comments last week," said Steve Van Order, fixed income strategist with Bethesda, Md.-based Calvert Investment Management. "Then the Germans and others came in with their offsetting comments and that was a little bit of a buzz kill.
"The recovery in Treasuries this week is an adjustment to the idea that the ECB is not going to be able to come out on Thursday and make the kinds of statement the peripheral bond market and other risk markets would like to see," he said.
US Treasuries maintained their gains despite a batch of stronger-than-expected data - on regional manufacturing, home prices, and consumer confidence - that typically would put downward pressure on prices of US government debt and encourage a rise in yields.
"All eyes are on the FOMC tomorrow, the ECB Thursday, and (US) payrolls Friday," said Eric Stein, vice president and portfolio manager at Eaton Vance Investment Managers in Boston.
Analysts said accommodative measures the Fed has at its disposal are further asset purchases, a cut in the interest rate on reserves, a time frame for potential rate increases pushed farther out on the horizon, or mere dovish guidance.
Market reaction to the Fed's announcement on Wednesday will depend on how intensely hopes for more accommodation get built into prices before the Fed and the ECB issue statements.
On Tuesday, benchmark 10-year Treasury notes were up 6/32 in price, their yields easing to 1.48 percent from 1.50 percent late on Monday.
Thirty-year bonds, which bore the brunt of the sell-off late last week, were up 13/32, their yields easing to 2.56 percent from 2.58 percent late Monday.
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