BLBG: U.S. 10-Year Notes Decline Most in Three Weeks as Stocks Rally
By Bo Nielsen and Wes Goodman
Oct. 28 (Bloomberg) -- U.S. 10-year Treasuries fell the most in almost three weeks as stocks rallied and the U.S. government prepared a record $34 billion note sale to help pay for bank rescues.
The U.S. needs to borrow ``enormous'' amounts, according to economic advisory firm Wrightson ICAP LLC, as it tries to halt a financial crisis that has wiped out more than $10 trillion of stock-market value worldwide this month. The Treasury will follow today's two-year sale with a $24 billion five-year auction on Oct. 30, the biggest since 2003.
``Increasing supply will help push up yields,'' said Rasmus Rousing, a fixed-income strategist in Zurich at Credit Suisse Group. ``We're also seeing a slight reversal of stock-market declines of the last few days and that's helping to take some buying interest out of Treasuries.''
Yields on 10-year notes rose 12 basis points to 3.80 percent as of 9:39 a.m. in London, according to BGCantor Market Data. The 4 percent security maturing in August 2018 dropped 1 percentage point, or $10 per $1,000 face amount, to 101 20/32.
Two-year yields increased 8 basis points to 1.61 percent.
The MSCI Asia Pacific Index of regional shares climbed 3.8 percent, snapping a four-day decline. The Dow Jones European Stoxx 600 index gained 2.3 percent, for the first increase since Oct. 20. Futures on the Standard & Poor's 500 Index rose 4.2 percent.
``The fundamental environment still argues for firm prices of U.S. Treasuries,'' wrote Peter Mueller, a fixed-income strategist in Frankfurt at Commerzbank AG, Germany's second- largest bank by assets. ``However, the equity market rally might overshadow the overall outlook today.''
Auction
The last two-year auction on Sept. 24 drew a yield of 2.115 percent. Investors bid for 2.21 times the amount of debt on offer, versus the average of 2.31 for the past 10 sales. The amount today matches the record in September.
The U.S. budget deficit may reach a record $1 trillion in 2009 from $455 billion in the fiscal year ended Sept. 30, Wrightson, which is based in Jersey City, New Jersey, said in a report yesterday. The Treasury Department is scheduled to announce how it plans to increase its debt sales on Nov. 5.
The government's bailout includes buying equity stakes in banks and purchasing soured financial assets. Credit-market losses and writedowns of securities tied to U.S. subprime mortgages have reached $678 billion since the start of 2007.
``This will be a tough auction,'' said Yasutoshi Nagai, chief economist at Daiwa Securities SMBC Co. in Tokyo, part of Japan's second-largest brokerage. ``Supply is rising. There are few people who want to buy.''
Ten-year yields will rise to 4.1 percent by year-end, Nagai said.
Bond Returns
Government securities rose 0.8 percent in October, heading for a fifth monthly gain, according to Merrill Lynch & Co.'s U.S. Treasury Master index, as tumbling stocks spurred demand for the safest assets.
The U.S. corporate and high-yield index handed investors a 9 percent loss, the most since the Merrill data began in 1997.
``You have to be careful not to be exposed to the long end'' of the Treasury market, said Mohamed El-Erian, the co- chief executive officer of Pacific Investment Management Co., speaking yesterday in a Bloomberg Television interview from Newport Beach, California.
Pimco's $129.6 billion Total Return Fund, the world's largest bond fund, last held Treasuries in December, according to the firm's Web site
U.S. consumers became more pessimistic in October, economists estimated before the New York-based Conference Board releases its confidence index today. The gauge slid to 52, which is 1 point above the 16-year low reached in June, according to the median forecast in a Bloomberg News survey.
House-Price Slump
A separate report from S&P/Case-Shiller may show a record 16.6 percent drop in home prices in the 12 months ended in August.
Futures on the Chicago Board of Trade show 100 percent odds the Federal Reserve will lower the target rate for overnight bank loans, now 1.5 percent, by at least a half-percentage point tomorrow to help increase bank lending and spur economic growth. The chances of a 0.75 point reduction rose to 34 percent from zero a week ago.
Banks are less willing to lend than they were two months ago. The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, was 2.67 percentage points, more than doubling since Aug. 28. The figure increased to 4.64 percentage points on Oct. 10, the most since Bloomberg began compiling the data in 1984.
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, was 2.63 percentage points. It widened from 0.78 percentage point two months ago.
To contact the reporters on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net
