BLBG: Treasuries Rise as Stocks Slide; 2-Year Yield Lowest Since 2003
By Wes Goodman
Nov. 12 (Bloomberg) -- U.S. Treasuries rose, sending two- year yields to the lowest level in five years, as stocks slid and speculation that General Motors Corp. will declare bankruptcy increased.
Notes climbed for a second day as losses triggered by a meltdown in the credit markets spread from banks to automakers and traders added to bets for the Federal Reserve to cut interest rates. The Treasury Department is scheduled to sell a record $20 billion of 10-year securities today to help pay for its $700 billion finance-industry rescue plan.
``Bond rates are falling because of the economic outlook and equity markets,'' said Roger Bridges, head of bonds who helps oversee the equivalent of $7.9 billion of debt at Tyndall Investment Management Ltd. in Sydney. ``There's a flight to quality.''
Two-year yields fell 4 basis points to 1.21 percent as of 6 a.m. in London, according to BGCantor Market Data. The price of the 1.5 percent security maturing in October 2010 gained 2/32, or 63 cents per $1,000 face amount, to 100 18/32.
Ten-year notes rose 7/32, and their yields dropped 3 basis points to 3.72 percent, compared with 3.79 percent at the last auction on Oct. 9.
The MSCI Asia Pacific Index of regional shares declined 1.6 percent, sliding for a second day. The Standard & Poor's 500 Index fell 2.2 percent yesterday, when the Treasury market was closed for the U.S. Veterans Day holiday.
Less Willing
Yields indicate banks are less willing to lend than before the credit crunch began to unfold last year. The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, widened to 1.82 percentage points from 0.18 percentage point in February 2007.
The spread expanded to 4.64 percent on Oct. 10, the most since Bloomberg began compiling the data in 1984.
General Motors Corp. dropped for a fifth day in New York trading as U.S. House Speaker Nancy Pelosi urged Congress to pass an emergency rescue package for the U.S. auto industry. The failure of ``one or more of the major American automobile manufacturers'' would have a ``devastating impact on our economy,'' Pelosi said yesterday.
Banks and securities companies worldwide have reported almost $1 trillion of losses and writedowns since the start of 2007 as the credit crunch threatens to throw the U.S., European and Japanese economies into recession.
Futures on the Chicago Board of Trade show a 94 percent chance the Fed will cut its target for overnight bank loans, now 1 percent, by 50 basis points at its next meeting Dec. 16. The odds of a reduction that steep rose from 50 percent a week ago.
Widest Since 2003
The difference between two- and 10-year yields increased to 2.51 percentage points as the shorter-maturity notes, those more sensitive to interest-rate changes, outperformed. It was the largest spread since October 2003.
Ten-year yields didn't fall as quickly because of speculation the government will increase its borrowing of long- term debt to spur the shrinking U.S. economy.
At October's 10-year sale, investors bid for 2.18 times the amount of debt available. The auction was one of four $10 billion offerings held over two days to alleviate shortages of the securities. The average for the past 10 sales is 2.18.
The U.S. auctioned $25 billion of three-year debt on Nov. 10, and it plans to sell $10 billion of 30-year bonds tomorrow, creating its biggest quarterly refunding since 2004.
Investors bid for 3.07 times the amount of three-year debt on offer.
``If you can auction $25 billion, which is a rather large size for any auction, and see that kind of demand out there with the understanding that there will be another one of these three- year notes next month, it tells you that there is still a lot of demand for U.S. Treasury'' securities, Drew Matus, senior U.S. economist at Merrill Lynch & Co., said in an interview Nov. 10.
Merrill, which is being sold to Bank of America Corp., is one of 17 primary dealers required to bid at government auctions.
Default Swaps
The cost of protecting corporate and government bonds from default in the Asia-Pacific region climbed for the second day, helping boost demand for the relative safety of sovereign debt.
The Markit iTraxx Japan index rose 10 basis points to 2.40 percentage points, according to Morgan Stanley. Credit-default swaps, contracts to protect against or speculate on default, pay the buyer face value if a company fails to adhere to its debt agreements.
Investors aren't ready yet to buy corporate bonds, said Jack Malvey, a fixed-income strategist at Barclays Capital in New York, another primary dealer.
``There are all sorts of very high-quality specimens within the bond market that have great value, but there's difficulty in reacting given the difficult performance in 2008 for so many types of investment categories,'' he said yesterday in a Bloomberg Radio interview.
U.S. two-year Treasuries have returned 6.1 percent this year, versus a gain of 5.4 percent for 10-year notes, according to Merrill Lynch & Co.'s U.S. Treasury indexes. Corporate bonds handed investors a 15 percent loss, Merrill's figures show.
To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.
