BLBG: U.S. 30-Year Yield Drops to Lowest Since Regular Sales Began
By Sandra Hernandez and Bo Nielsen
Oct. 24 (Bloomberg) -- Treasuries rose, sending the yield on the 30-year bond to the lowest since regular issuance of the securities began in 1977, as widening financial turmoil wiped more than $10 trillion off stock markets worldwide this month.
U.S. notes rallied on speculation the global slowdown will deepen. The U.K. economy shrank more than forecast, a report showed today. Trading in U.S. stock-index futures was limited after declines of more than 6 percent. U.S. government securities returned 1.6 percent in October, the most since January, according to Merrill Lynch & Co.'s U.S. Treasury Master index, as tumbling stocks spurred demand for the safest assets.
``We're getting very close to the emotional blow-off where everybody says, `I don't care; I want out,''' said E. Craig Coats Jr., who co-heads fixed income at Keefe, Bruyette & Woods Inc. in New York. ``Everybody seems to be saying `I want to be in cash or Treasuries.'''
The yield on the 4 1/2 percent bond due in May 2038 decreased 10 basis points, or 0.10 percentage point, to 3.95 percent at 9:44 a.m. in New York, according to BGCantor Market Data, after dropping as low as 3.8676 percent. The price advanced 1 24/32, or $17.50 per $1,000 face value, to 109 17/32.
Ten-year note yields declined 12 basis points to 3.57 percent, and have fallen 37 basis points this week, the most since 1995, on speculation government and central bank efforts to revive lending won't avert a global slowdown.
``Bonds are the instrument, par excellence, to profit from the crisis,'' Societe Generale SA said in a report.
`Fires Are Spreading'
U.S. stocks dropped. The MSCI Asia Pacific Index of regional shares fell as much as 6.2 percent to its lowest level since 2003. Trading in futures on the Standard & Poor's 500 Index and the Dow Jones Industrial Average was limited after declines in contracts of more than 6 percent triggered a so- called limit down restriction.
``The fires are spreading around the globe,'' Peter Mueller, a fixed-income strategist in Frankfurt at Commerzbank AG, Germany's second-largest bank by assets, wrote in a note today. ``The flight to quality should therefore continue to give massive support to bunds and U.S. Treasuries as this week draws to a close.''
The difference between yields on two- and 10-year notes widened for the first time in more than a week as the shorter maturities, which are more sensitive to monetary policy, outperformed. The yield spread widened 9 basis points to 2.16 percentage points. It's still narrower than this year's high of 2.39 percentage points on Oct. 15.
Traders can profit from a widening yield spread by buying two-year notes and selling 10-year notes.
Yen, Pound
Two-year note yields dropped 18 basis points to 1.41 percent. They touched 1.35 percent, the lowest in more than two weeks.
This year's credit-market meltdown prompted Federal Reserve officials to make an emergency reduction in borrowing costs on Oct. 8, and they will cut again when they meet on Oct. 29, futures contracts indicate.
Futures on the Chicago Board of Trade show a 100 percent chance policy makers will lower their target for overnight bank lending, now 1.5 percent, by at least a half-percentage point, compared with 38 percent odds a week ago.
The yen climbed to a 13-year high against the dollar as the risk of a global recession prompted investors to slash carry trades, in which they fund purchases of higher-yielding assets with the Japanese currency. The British pound had its biggest decline in at least 37 years after the Office for National Statistics in London said the economy contracted 0.5 percent in the third quarter, exceeding the 0.2 percent forecast by analysts in a Bloomberg survey.
Emerging-Market Assets
Investors sold emerging-market stocks, bonds, and currencies as the credit crisis imperiled developing economies. The Polish zloty, Hungarian forint and South African rand headed for their biggest weekly declines. Ukraine's credit ratings were lowered for the second time since June by Standard & Poor's on concern about the country's banks, a day after Russia's credit rating outlook was lowered to ``negative'' from ``stable.''
``There's uncertainty and anxiety,'' said Hiroyuki Bando, chief manager for fixed income, equities and currencies in Tokyo at Mitsubishi UFJ Trust & Banking Corp., part of Japan's biggest bank. ``That's supportive for Treasuries.''
Yields on three-month Treasury bills, sought as a haven in times of uncertainty, fell 21 basis points to a one-week low of 0.75 percent. They were 3.38 percent at the start of the year.
TED Spread
The difference between what banks and the U.S. government pay to borrow for three months, known as the TED spread, widened for a second day, to 2.75 percentage points. The spread, which is the difference between three-month bill yields and the three- month London interbank offered rate, is more than triple this year's low of 76 basis points in May.
Another indicator of credit stress, the difference between the rate banks charge for three-month dollar loans relative to the overnight indexed swap rate, the so-called Libor-OIS spread, widened to 2.64 percentage points from 2.54 percentage points yesterday. The spread has narrowed from 3.64 percentage points on Oct. 10.
Yields on Treasury Inflation-Protected Securities with maturities of up to five years were higher than yields on conventional Treasuries of similar maturity in another sign investors are liquidating positions and betting on a deepening U.S. recession.
The difference between yields on five-year Treasuries and five-year TIPS was minus 0.06 percentage points. TIPS typically yield less than Treasuries because their principal payments rise at the rate of inflation. A shrinking yield gap indicates investors expect inflation to slow.
``The financial crisis is now morphing ever more clearly into an economic one,'' Ciaran O'Hagan, a fixed-income strategist in Paris at Societe Generale, said in a report yesterday. ``That leaves spread markets still going in only one direction -- south.''
To contact the reporters on this story: Sandra Hernandez in New York at shernandez4@bloomberg.net; Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net.
