BLBG: Treasuries Are Little Changed Before Record Two-Year Note Sale
By Bob Chen
Oct. 27 (Bloomberg) -- Treasuries were little changed following last week's rally before the U.S. government sells $64 billion of notes this week including a record amount of two-year securities.
Investors are beginning to shift money into corporate and federal agency debt in a sign that the credit crisis may be at its peak. Ried, Thunberg & Co.'s weekly money manager's index showed bearish sentiment in U.S. government bonds while the cost to borrow overnight in dollars dropped to the lowest level since 2004 last week.
``Supply influences the cost movements in the short term,'' said Kei Katayama, who oversees $1.6 billion of non-yen debt as leader of the foreign fixed-income group in Tokyo at Daiwa SB Investments Ltd., part of Japan's second-biggest investment bank. ``That's why the market is a little bit lower.''
The two-year note yield was 1.46 percent as of 6:33 a.m. in London, according to BGCantor Market Data. The 2 percent security maturing in September 2010 traded at a price of 101.
Ten-year note yields were little changed at 3.66 percent. A basis point is 0.01 percentage point.
The government will sell $6 billion of five-year Treasury Inflation Protected Securities, or TIPS today. It will auction $34 billion of two-year notes tomorrow and $24 billion of five- year debt on Oct. 30.
Gross issuance of Treasury coupon securities will rise to about $1.15 trillion in the 2009 fiscal year from $724 billion last year, according to Credit Suisse Securities USA LLC, another primary dealer.
`Bulk' of Gains
The London interbank offered rate, or Libor, for overnight dollars dropped to 1.11 percent on Oct. 22 before ending the week at 1.28 percent, according to the British Bankers' Association. The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, was at 2.67 percentage points compared with 3.15 percentage points at the end of September.
Ried Thunberg's measure of money manager sentiment through the end of December rose to 44 for the week ended Oct. 24 from 42 the week before. Readings below 50 indicate investors expect bonds to decline. The Jersey City, New Jersey-based firm surveyed 30 fund managers controlling $1.5 trillion in assets.
``We've probably seen the bulk of the gains we're going to see in Treasuries,'' said Donald Ellenberger, co-head of government and mortgage-backed securities at Pittsburgh-based Federated Investment Management Co., which oversees $21 billion in fixed-income assets. Ellenberger's Federated U.S. Government Securities Fund has outperformed 98 percent of its peers year-to- date, according to Morningstar.
Stocks Slump
What's starting to make Treasury bulls wander are signs that the credit freeze may be about to break. The Federal Reserve will begin buying money-market securities including short-term company IOUs known as commercial paper today, while the government will start to guarantee new debt issued by banks.
Futures on the Chicago Board of Trade show a 26 percent chance Fed policy makers will lower their target for overnight bank loans, now 1.5 percent, by 75 basis points, up from zero- percent odds a week ago. Bets for a half-point reduction are 74 percent.
Asian stocks slumped on concern that the global economy is headed for a recession even after governments and central banks cut interest rates and pumped cash into money markets to unlock credit.
The MSCI Asia Pacific Index of regional shares fell 5.6 percent, a fourth day of declines. U.S. stock futures were also lower, swinging between gains and losses.
GDP Contraction
The Bank of Korea slashed interest rates by a record at an emergency meeting today in an attempt to restore confidence. Governor Lee Seong Tae lowered the seven-day repurchase rate by 75 basis points to 4.25 percent.
``Sharply falling stocks and increased turmoil in the emerging economies will hurt consumer sentiment,'' said Hidehiko Maejima, international bond strategist in Tokyo at BNP Paribas Securities Japan Ltd. The U.S. GDP forecast ``is something of the past. This week I'm slightly bullish for U.S. government bonds.''
Gross domestic product in the world's largest economy contracted at a 0.5 percent annual rate from July to September, the biggest drop since the 2001 recession, according to the median estimate in a Bloomberg News survey ahead of Commerce Department figures due Oct. 30. A separate report today may show purchases of new homes fell in September to a 17-year low, another survey showed.
Japan's Nikkei 225 Stock Average erased a gain of 3 percent to close 6.4 percent lower. The yen strengthened even after the Group of Seven industrialized nations expressed concern about ``excessive gains'' because of a 13-year high against the dollar reached on Oct. 24
Prime Minister Taro Aso ordered officials to draft measures to help stabilize markets as early as today, which may include the purchase of shares held by the nation's banks.
To contact the reporter on this story: Bob Chen in Hong Kong at bchen45@bloomberg.net.
