Tue Jul 31, 2012 9:27am EDT
* Fed meets Tuesday-Wednesday, ECB and BoE on Thursday
* Markets expect central bank action, timing uncertain
By Ellen Freilich
NEW YORK, July 31 (Reuters) – U.S. 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
After safe-haven Treasuries sold off last week, a second day of gains this week appears to reflect, at least partially,
expectations the Fed could take accommodative steps. These could include 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.
“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.
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 7/32 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 17/32, their yields easing to
2.56 percent from 2.58 percent late Monday.
Action by central banks could favor riskier assets, to the detriment of safe-haven Treasuries. But it could also favor
riskier assets and Treasuries simultaneously, especially if they include more bond purchases by the Fed in the open market.
Some analysts say the Fed will mainly offer markets dovish language and the hope of further action if conditions warrant.
Others say the Fed could undertake one or more steps, including purchases of bonds in the open market.
After forceful remarks from European Central Bank President Mario Draghi on protecting the euro zone last week, some
analysts believe the ECB must take action this week or risk disappointment that could send sovereign yields for some euro
zone nations unacceptably high.
Central bankers are looking at the fragile state of their respective economies. Bank of Spain data released on Tuesday
showed capital flowed out of Spain at a higher level in May than in April. Separate data showed retail sales fell for the 24th
straight month. Italy’s jobless rate hit 10.8 percent in June, up from a revised 10.6 percent in May.
In the U.S., inflation-adjusted consumer spending fell in June for the first time in nearly a year.\
Adam Sarhan, chief executive of Sarhan Capital in New York, said the report was the latest in a stream of lackluster
economic data markets have seen over the past several months.
“It doesn’t tip the hand of the market, the Fed or the economy one way or the other,” he said. “The market is just
yawning at them ahead of the Fed meeting.”
Similarly, U.S. single-family home prices rose for the fourth month in a row in May on a seasonally adjusted basis
eliciting little market reaction.