BLBG: Treasuries Fall as Borrowing Rates Ease; Supply Seen Increasing
By Sandra Hernandez and Lukanyo Mnyanda
Oct. 16 (Bloomberg) -- Treasuries declined as banks' borrowing costs fell and traders speculated the U.S. government will increase debt sales to pay for the rescue of the nation's financial system.
Traders pushed up yields on U.S. government debt as the rate that banks charge each other for overnight dollar loans in London fell to the lowest level in almost four years. Treasuries lost 0.2 percent in October, headed for the first monthly decline since May, Merrill Lynch & Co.'s Treasury Master index showed, after the U.S. and other nations agreed to spend almost $3 trillion to rescue banks imperiled by the credit crisis.
``Short-term financing looks a little improved,'' said David Brownlee, who oversees $15 billion as head of fixed income at Sentinel Asset Management in Montpelier, Vermont. ``You're going to have massive amounts of Treasury supply coming. The path of least resistance for Treasuries right now is a little bit higher rates.''
The 10-year yield rose 6 basis points, or 0.06 percentage point, to 4.00 percent at 8:40 a.m. in New York, according to BGCantor Market Data. The price of the 4 percent security maturing in August 2018 dropped 14/32, or $4.38 per $1,000 face amount, to 99 31/32. The two-year yield increased 12 basis points to 1.66 percent.
Overnight Libor fell 21 basis points to 1.94 percent, the lowest since November 2004, the British Bankers' Association said. That's down from a record 6.88 percent on Sept. 30.
Three, Seven-Year Notes
The cost of living in the U.S. was unchanged in September, the Labor Department said in Washington. Initial jobless claims fell last week, while total benefit rolls rose to the highest level in five years, the department said in another report.
President George W. Bush's administration said this week it plans to spend $250 billion buying stakes in financial firms to thaw a credit freeze that sparked a global stock rout.
There's likely to be more frequent auctions of 10-year notes, along with the reintroduction of three- and seven-year securities and increased sales of all maturities, as the U.S. funds its bailout plan, said Wrightson ICAP LLC in Jersey City, New Jersey, an economic advisory firm specializing in government finance.
Two-year note yields fell the most this month yesterday after Federal Reserve Chairman Ben S. Bernanke said measures to revive the economy will take time to work.
``The bottom line is that the U.S. government needs to raise more cash, and that's left the supply outlook uncertain,'' said David Schnautz, a fixed-income strategist in Frankfurt at Commerzbank AG, Germany's second-biggest lender. ``Yields fell off a cliff yesterday after policy makers gave a dim view of the economy, leaving little room for them to fall further in the short term.''
Budget Deficit
The slowing economy means ``there's still value'' in Treasuries, and the two-year yield may drop to 1.1 percent by the end of 2008, while the 10-year note may pay 3.3 percent, Schnautz said. The notes may yield 1.7 percent and 3.6 percent at the end of December, according to analysts and strategists' forecasts compiled by Bloomberg.
The budget deficit swelled to a record $455 billion for the 12 months ended Sept. 30, compared with a $162 billion shortfall a year earlier and the previous high of $413 billion in 2004, the government said Oct. 14. The deficit will approach $2 trillion as the nation pays for its $700 billion bank-aid plan and the bailouts of American International Group Inc., Fannie Mae and Freddie Mac, according to David Greenlaw, Morgan Stanley's chief economist.
Declines by Treasuries may be limited as falling stock markets and concern that the global economy is headed for recession boost demand for the safest assets, said Satoshi Okumoto, a general manager in Tokyo at Fukoku Mutual Life Insurance Co., with $57.2 billion in assets.
`Subpar' Performance
``It's the last haven,'' Okumoto said. ``The economy is going to collapse.''
The MSCI World Index lost 2.4 percent as benchmark indexes from Tokyo to Budapest fell on growing concern bank bailouts in the U.S. and Europe will fail to avert a global recession. Futures on the Standard & Poor's 500 Index rose 2.4 percent. The S&P yesterday plunged the most since the 1987 crash.
The U.S. economy may not improve until late 2009, Fed Vice Chairman Donald Kohn said.
``I see the most probable scenario as one in which the performance of the economy remains subpar well into next year and then gradually improves in late 2009 and 2010,'' Kohn said yesterday in prepared remarks to the Georgetown University Wall Street Alliance in New York.
Rate Bets
Traders' expectations for inflation over the next decade have fallen to the lowest level in almost 10 years as the price of oil fell from a record. The difference between rates on 10- year Treasury Inflation Protected Securities, or TIPS, and conventional notes was 0.98 percentage points.
Crude oil fell to $73.42 a barrel in New York, less than half its record price of $147.27 on July 11.
Futures on the Chicago Board of Trade showed a 48 percent chance policy makers will reduce the 1.5 percent target rate for overnight lending between banks by a half-percentage point. The odds were 40 percent yesterday. The rest of the bets are for a quarter-point cut.
To contact the reporters on this story: Sandra Hernandez in New York at shernandez4@bloomberg.net; Lukanyo Mnyanda in London at lmnyanda@bloomberg.net
