BLBG: Treasuries Rise for Second Day; Two-Year Yield at Five-Year Low
By Kim-Mai Cutler and Wes Goodman
Nov. 12 (Bloomberg) -- Treasuries rose, sending two-year yields to the lowest level in more than five years, amid speculation General Motors Corp. will declare bankruptcy.
Notes climbed for a second day as credit-market losses spread from banks to automakers and traders added to bets the Federal Reserve will cut interest rates. The U.S. Treasury plans to sell a record $20 billion of 10-year securities today to help pay for its $700 billion finance-industry rescue package.
``Yields could go lower if we don't see a recovery of risky assets and if the Fed lowers rates again,'' said Karsten Linowsky, a fixed-income strategist in Zurich at Credit Suisse Group, Switzerland's second-largest lender.
Two-year yields fell 3 basis points to 1.22 percent as of 10:25 a.m. in London, the lowest level since June 2003, according to BGCantor Market Data. The 1.5 percent security maturing October 2010 gained 2/32, or 63 cents per $1,000 face amount, to 100 18/32.
The yield on the 10-year note dropped 3 basis points to 3.72 percent, compared with 3.79 percent at the last auction on Oct. 9.
Bank Lending
Yields indicate banks are less willing to lend to each other. The difference between what they and the Treasury pay to borrow money for three months, the so-called TED spread, widened to 1.82 percentage points, from 1.75 percentage points yesterday. The spread expanded to 4.64 percent on Oct. 10, the most since Bloomberg began compiling the data in 1984.
GM tumbled to the lowest price since 1943 yesterday 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.
The U.S. downturn will be the longest in three decades, and the drought in consumer spending may be the worst ever, according to economists surveyed by Bloomberg News.
Analysts forecast U.S. gross domestic product will shrink 0.35 percent this quarter after an annualized 0.30 percent contraction in the three months ended September.
Extra Stimulus
Barack Obama, speaking with President George W. Bush on Nov. 10, talked about the urgency for aid to automakers and the need for a second economic stimulus package, according to aides to the president-elect.
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 a recession.
Futures on the Chicago Board of Trade show a 94 percent chance the Fed will lower its target rate for overnight bank loans percent by 50 basis points to 0.5 percent at its Dec. 16 meeting. The odds rose from 50 percent a week ago.
The difference between two- and 10-year yields increased to 2.50 percentage points based on closing prices 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.
Demand for Treasuries
At October's 10-year sale, investors bid for 2.31 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 plans to sell $10 billion of 30-year bonds tomorrow in 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
Credit-default swaps protecting against a GM default for five years rose to 62 percentage points yesterday, according to CMA Datavision, the most since the company began tracking the figures in 2004. The figure has averaged about 18 percentage points over the past year.
The cost of protecting European corporate bonds from default rose, according to traders of credit-default swaps.
Contracts on the Markit iTraxx Crossover Index of 50 European companies with mostly high-risk, high-yield credit ratings increased 8 basis points to 803, according to JPMorgan Chase & Co. prices. 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 13 percent loss, Merrill's figures show.
To contact the reporters on this story: Kim-Mai Cutler in London at kcutler@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net
