U.S. Yield Curve Flattens on Bets Fed to Be More Accommodative-commentary Wade Dokken

U.S. Annuity Rates heavily impacted by continue decline in short interest rates.

Annuity rates have had a huge collapse of interest rates, and caps due to the continued fall of short term interest rates.  U.S. insurers are struggling to maintain their spreads and this is forcing major annuity writers to lower caps and interest rates.  The products that Americans rely upon for their private pensions are reducing rates and damaging their fixed income needs.  This further reduction in what savers can realize in "safe money" investments is adding great anxiety to the American Retirement Crisis.  Wade Dokken

U.S. Yield Curve Flattens on Bets Fed to Be More Accommodative

September 20, 2010, 10:34 AM EDT

By Susanne Walker and Cordell Eddings

Sept. 20 (Bloomberg) -- The extra yield Treasury investors demand to hold 10-year notes over 2-year securities dropped for a second day on speculation the Federal Reserve will be more accommodative in its policy statement tomorrow.

The central bank is acquiring Treasury notes due from September 2016 to August 2020 today with the proceeds of its maturing mortgage holdings, according to the New York Fed’s website. Some traders bet the Fed will announce more purchases of Treasuries in a policy known as quantitative easing.

“We will eventually get QE, but I don’t think tomorrow is the day we will be upping the ante on that,” said David Ader, head of government bond strategy in Stamford, Connecticut, at CRT Capital Group LLC.

The yield on the 30-year bond dropped 1 basis point, or 0.01 percentage point, to 3.90 percent at 10:26 a.m. in New York, according to BGCantor Market Data. The price of the 3.875 percent security maturing in August 2040 increased 1/8, or $1.25 per $1,000 face amount, to 99 18/32.

The two-year note yield was little changed at 0.47 percent after dropping 10 basis points last week in its biggest five-day decrease since May 7, when it slid 15 basis points. The yield touched the all-time low of 0.45 percent on Aug. 24. The 10-year note yield was little changed at 2.74 percent, compared with a 19-month low of 2.42 percent reached Aug. 25.

“I see nothing in our technical work that suggests that Treasuries need to be chased here,” William O’Donnell, managing director in Stamford at Royal Bank of Scotland Plc, wrote in a note to clients. “Buy a back-up into the 2.87 percent to 3.06 percent support band in 10-years.” RBS is one of the 18 primary dealers that trade directly with the Fed.

Yield Curve

The difference between yields on 10- and 2-year notes dropped to 2.26 percentage points, reflecting concern the U.S. economic recovery is stalling. It was the narrowest on a closing basis since Sept. 15.

Thirty-year bonds pared gains as U.S. stocks rallied. The Standard & Poor’s 500 Index gained 0.9 percent. Crude oil for October rose for the first time in four days, increasing 1.2 percent to $74.56 a barrel.

Ten-year notes rose on Aug. 10, when the Fed said after its policy meeting that it would keep its bond holdings level by resuming the purchase of U.S. debt to support a recovery it described as “more modest” than earlier anticipated. The central bank also reiterated a commitment to keeping its target lending rate close to zero for an “extended period.”

The Fed has purchased $22.9 billion of Treasuries since Aug. 17 to keep holdings in the System Open Market Account at about $2 trillion by using the proceeds of principal payments from its agency mortgage-backed securities and agency debt.

Outlook for Fed

The central bank will hold off at its meeting tomorrow from expanding its balance sheet by purchasing securities, according to 60 of 64 analysts surveyed Sept. 16-17. Fifty-four of 63 economists said the Fed will leave unchanged the sentence in its statement saying high unemployment and low inflation warrant “exceptionally low” rates for an “extended period.”

Consumer prices excluding food and energy increased for a fifth straight month at an annual rate of 0.9 percent, the Labor Department reported on Sept. 17. The pace matched the slowest year-over-year pace of gains since 1966.

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the maturity, was 1.79 percentage points, less than the five-year average of 2.11.

Investors in a weekly survey by Ried Thunberg ICAP, a unit of the world’s largest inter-dealer broker, were less bearish on Treasuries. Ried’s index on the outlook for U.S. debt through June rose to 44 for the seven days ended Sept. 17 from 43 the week before. A figure less than 50 indicates that investors expect prices to fall.

--Editors: Dennis Fitzgerald

To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

via businessweek.com