BLBG: Treasuries Decline as Stock Gains Sap Demand for Safest Assets
By Anchalee Worrachate and Wes Goodman
Oct. 30 (Bloomberg) -- Treasuries fell after interest-rate cuts in the U.S. and Asia and signs of a revival in bank lending pushed stocks higher, sapping demand for the safest assets.
The declines sent five-year yields to the highest level in more than a week on speculation bidding will weaken at a sale of $24 billion of the notes today. The auction matches the largest since 2003 as the U.S. raises funds to pay for its $700 billion bank-rescue package. Policy makers in the U.S., China, Taiwan and Hong Kong are reducing rates to stimulate the global economy and unlock credit markets.
``There's some profit-taking on Treasuries from the prior down-moves in yields after the rate cut,'' said Padhraic Garvey, head of investment-grade debt strategy at ING Bank NV in Amsterdam. ``The Fed is doing a remarkable amount to help out the system and restore confidence. A rate cut yesterday was the right move and supported market sentiment and equities.''
The yield on the benchmark 10-year note rose 6 basis points to 3.92 percent as of 11:17 a.m. in London, according to BGCantor Market Data. The 4 percent security maturing August 2018 dropped 15/32, or $4.69 per $1,000 face amount, to 100 22/32.
The two-year note yield gained 6 basis points to 1.6 percent. The Fed will cut rates by another 50 basis points by year-end, Garvey predicted.
Five-year yields increased as much as 8 basis points to 2.80 percent. Declines this year have left them 32 basis points lower than yields on same-maturity Treasury Inflation Protected Securities. A basis point is 0.01 percentage point.
Yield Premium
The conventional notes offered a yield premium of 1.84 percentage points over the inflation-protected securities on average for the past six months, according to data compiled by Bloomberg, to compensate investors in case of quickening prices for goods and services.
At the last five-year auction on Sept. 25, investors bid for 1.91 times the amount of debt offered. The average for the past 10 sales is 2.12.
The MSCI World Index of shares rose 2.7 percent as equities in Europe and Asia surged, helping curb demand for the relative safety of government securities.
The cost of protecting European corporate bonds from default fell, according to traders of credit-default swaps. Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-risk, high-yield credit ratings decreased 16 basis points to 815, according to JPMorgan Chase & Co. The index is a benchmark for the cost of protecting bonds against default and a drop indicates an improvement.
Swap Lines
The Fed agreed to provide $30 billion each to the central banks of Brazil, Mexico, South Korea and Singapore in so-called swap lines, expanding its effort to unfreeze money markets to emerging nations for the first time.
The yield premium on emerging-market dollar bonds over Treasuries narrowed to 6.82 percentage points, from 7.32 points yesterday, according to JPMorgan Chase & Co.'s EMBI+ index. The spread jumped 5.72 points from a record low of 1.49 points in June 2007, reaching its widest since 2002 earlier this month.
Interest-rate derivatives imply banks are becoming more willing to lend. 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, narrowed to 2.65 percentage points from 3.64 points on Oct. 10.
Investors can earn extra yield by buying so-called agency bonds issued by Fannie Mae and Freddie Mac, the two largest providers of funds for mortgages that the U.S. government seized last month.
Extra Yield
Fannie's five-year notes yielded 1.40 percentage points more than Treasuries, Bloomberg data show. The spread narrowed from 1.52 percentage points on Oct. 27, which was the most since Bloomberg began tracking the figure in 1997.
Bill Gross, manager of the world's biggest bond fund at Pacific Investment Management Co., said he recommends mortgage- backed securities issued by government-sponsored enterprises such as Fannie and Freddie, and the debt of banks that have sold stakes to the U.S. government.
``With Uncle Sam as your partner, default seems remote,'' Gross said in a monthly commentary on the Web site of Newport Beach, California-based Pimco.
Two-year Treasury notes rose yesterday after the Fed cut its benchmark interest rate by half a percentage point to 1 percent, the lowest level since June 2004, saying ``downside'' risks to growth remain in the U.S. economy.
Traders speculated the Fed's statement signaled another reduction in December. Futures contracts on the Chicago Board of Trade showed odds of 70 percent on a decrease in the target rate for overnight loans between banks to 0.75 percent.
Growth Shrinks
The American economy shrank at a 0.5 percent annual rate in the third quarter, the most since the 2001 recession, according to the median estimate in a Bloomberg News survey of economists. The Commerce Department will release the figure at 8:30 a.m. in Washington.
Longer-term securities lagged behind this month in anticipation of increased government debt sales. The Treasury is scheduled to announce on Nov. 5 how it will increase debt sales.
``Supply coming from the Treasury market is going to be very large and people will start to factor that in,'' E. Craig Coats Jr., who co-heads fixed income at Keefe, Bruyette & Woods Inc. in New York, said yesterday.
Treasuries underperformed European bonds on speculation the European Central Bank will have to catch up with the Fed in reducing borrowing costs. The 10-year Treasury yield, which rose above that of German bunds for the first time in almost a year on Oct. 28, was 4 basis points higher today.
-- With reporting by Robert Burgess and Cordell Eddings in New York. Editors: Ralph Johnston, Neil Maclucas
To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net
