Treasuries Gain on Obama Vote, Head for Biggest Gain in a Week

By Wes Goodman

Nov. 7 (Bloomberg) -- Treasuries rose, headed for the biggest gain in a week, as President Barack Obama's election to a second term bolstered expectations the Federal Reserve will stick to its policy of buying bonds to support the economy.

Obama, a Democrat, backs the Fed, which has purchased $2.3 trillion of Treasuries and mortgage-related bonds and instituted plans to purchase $40 billion of home-loan securities a month.
Republican challenger Mitt Romney said he wouldn't reappoint Fed Chairman Ben S. Bernanke to a third term in 2014. The U.S. is scheduled to sell $24 billion of 10-year notes today.

"With Obama winning, we can expect the Fed to carry out current monetary policy," said Hajime Nagata, who helps oversee the equivalent of $129.4 billion as an investor in Tokyo at Diam Co., a unit of Dai-ichi Life Insurance Co., Japan's second- biggest life insurer. "The Fed is committed
to a low interest- rate environment. If Romney had won, it would have been a game changer."

U.S. 10-year yields slid six basis points, or 0.06 percentage point, to 1.69 percent as of 6:26 a.m. in London, according to Bloomberg Bond Trader prices. The 1.625 percent security due in August 2022 climbed 18/32, or $5.63 per $1,000 face amount, to 99 14/32. It was set for the biggest gain since Oct. 26.

Japan's 10-year rate was unchanged at 0.76 percent. It was 0.755 percent earlier Tokyo trading, matching the lowest level since August.

Election History

Ever since Lyndon B. Johnson defeated Barry Goldwater for the presidency in 1964, yields on 10-year Treasuries have dropped about 40 basis points in the first month when a Democrat wins, and risen 19 after a Republican victory, according to data compiled by Bloomberg.

The central bank announced its third round of bond purchases under its quantitative easing policy, known on QE3, on Sept. 13, saying it will buy agency mortgage-backed securities until the outlook for the labor market improves "substantially."

"The Romney camp is much more nervous about QE3 and an unconventional Fed than the Obama camp," Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., said this week. A Romney victory would have created "a lot more uncertainty about monetary policy," El-Erian said Nov. 5 in an interview with Bloomberg Television's Maryam Nemazee.

Pimco, based in Newport Beach, California, runs the world's biggest bond fund.

Operation Twist

The Fed is also swapping shorter-term Treasuries in its holdings with those due in 6 to 30 years as part of its efforts to support the economy by putting downward pressure on long-term borrowing costs.

The central bank plans to buy as much as $2.25 billion of Treasuries maturing from February 2036 to August 2042 today, according to the Fed Bank of New York's website.

It is scheduled to sell as much as $8 billion of debt due from May 2014 to April 2015, the website shows.

"Treasury yields will go down" on an Obama victory, said Kim Youngsung, head of fixed income in Seoul at Samsung Asset Management Co., South Korea's largest private bond investor with the equivalent of $103.8 billion, speaking prior to Obama's victory.

Ten-year yields, benchmarks for mortgages to corporate bonds, dropped 19 basis points this year. They have tumbled 69 basis points since Obama took office on Jan. 20, 2009.

Treasuries have returned 1.8 percent in 2012 and 15 percent since the inauguration, according to Bank of America Merrill Lynch indexes.

Greek Vote

Greek Prime Minister Antonis Samaras faces a test of his coalition government today as he seeks parliamentary approval of austerity measures to unlock bailout funds amid the third general strike in six weeks and defections from his three-party coalition.

The U.S. Treasury Department sold $32 billion of three-year notes yesterday and is scheduled to conclude this week's auctions with a $16 billion 30-year bond sale tomorrow.

The last auction of 2022 Treasuries on Oct. 10 drew bids for 3.26 times the amount of debt offered, versus the average of 3.08 for the previous 10 auctions.

Yesterday's three-year sale drew a yield of 0.392 percent, compared with a forecast of 0.383 percent in a Bloomberg News survey of 9 of the Fed's 21 primary dealers, those companies that underwrite the U.S. debt. Investors submitted bids for 3.41 times the debt available, the least since April.

Indirect bidders, the investor class that includes foreign central banks, purchased 25.1 percent of the notes, the smallest amount since May 2007.