BLBG: U.S. Treasuries Are Little Changed as Producer Prices Plunge
By Dakin Campbell and Kim-Mai Cutler
Nov. 18 (Bloomberg) -- Treasuries were little changed after a government report showed prices paid to U.S. producers plunged in October by the most on record as weakening global growth caused demand for commodities to dry up.
Bonds initially pared gains after so-called core producer prices that exclude fuel and food rose a greater-than- anticipated 0.4 percent for a second month, indicating declines have yet to make it down assembly lines.
``The core numbers came out a bit better than expected and I think that is a bit of a surprise,'' said Lawrence Dyer, an interest-rate strategist in New York at HSBC Securities USA Inc., one of the 17 primary dealers that trade bonds with the Federal Reserve. ``It is a bit of a head scratcher as to why the core number was up. You take a more defensive position.''
Benchmark two-year notes' yield increased one basis point, or 0.01 percentage point, to 1.21 percent at 8:41 a.m. in New York, according to BGCantor Market Data. The 1.5 percent security maturing in October 2010 fell 1/32, or 31 cents per $1,000 face amount, to 100 18/32. The yield on five-year notes rose two basis points to 2.29 percent. It touched 2.24 percent, the lowest level since March.
The 10-year note yield was 3.64 percent. The yield on the 30-year bond slipped for a third day, to 4.18 percent.
The larger-than-forecast 2.8 percent drop in producer prices was the biggest since records began in 1947 and followed a 0.4 percent decline in September, the Labor Department said today in Washington. The median projection in a Bloomberg News survey was for a 1.9 percent fall.
Consumer prices dropped 0.8 percent, the most since 1949, a separate Bloomberg survey showed. The report is due tomorrow.
Inflation Expectations
Traders' expectations for inflation over the next decade waned as growth slowed and the price of crude oil sank 62 percent from a record in July, yields show.
The difference between rates on 10-year Treasury Inflation Protected Securities, or TIPS, and conventional notes was 72 basis points, compared with 89 basis points at the end of last week. The spread shrank to 66 basis points on Oct. 27, the least since October 1998.
Lower inflation expectations augur a reduction in the yield difference between notes and bonds, said Nick Stamenkovic, a fixed-income strategist in Edinburgh at RIA Capital Markets.
``We're likely to have a period of flattening in the yield curve,'' Stamenkovic said. ``I'm still bullish on bonds, but I might increase exposure to longer-dated bonds. The depth of the recession should ensure that supply is well-absorbed.''
TIC Data
The so-called yield spread between two- and 30-year notes narrowed for a third day, to 2.97 percentage points. The spread was 3.12 percentage points on Nov. 13, the most in more than four years.
Net purchases of U.S. bonds, notes and stocks rose to $27.2 billion in September, from $14 billion the month before, based on a Bloomberg survey of economists before a Treasury Department report today. It would be the most in three months.
U.S. two-year yields were near a five-year low as traders raised bets the Fed will cut interest rates next month to spur growth. The notes are among the most sensitive to changes in borrowing costs because of their short maturity.
Futures on the Chicago Board of Trade show a 94 percent chance the Fed will reduce its 1 percent target rate for overnight bank loans by 50 basis points on Dec. 16.
Gains in Treasuries may be limited as the market overestimates how much further the central bank will cut borrowing costs.
Daiwa Position
``I'm planning to sell'' Treasuries, 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. ``The Fed is close to ending'' the reductions.
U.S. policy makers have cut the target rate from 5.25 percent in September 2007 and pumped money into the economy to try to spur growth. It has ``done about as much as it can,'' Fed Bank of Kansas City President Thomas Hoenig said yesterday in an interview with PBS's Nightly Business Report.
Paulson and Fed Chairman Ben S. Bernanke are scheduled to testify before the House Financial Services Committee today.
``A standstill in the U.S. rescue measures would generally support the prices of U.S. Treasuries,'' wrote Peter Mueller, a Frankfurt-based fixed-income strategist for Commerzbank AG, in a note to clients.
U.S. government securities returned 6.8 percent this year, according to Merrill Lynch & Co.'s U.S. Treasury Master index, as investors sought all but the safest securities. Corporate bonds fell 15 percent, the Merrill figures show.
Bill Purchases
Investors piling into U.S. three-month bills, seen as among the most secure investments because of their short maturities, pushed the yield down to 0.09 percent yesterday. It was the weakest since September, when the rate fell to 0.02 percent, a level not seen since World War II.
Banks are less willing to lend than earlier in the year, judging by market yields. The difference between what lenders and the Treasury pay to borrow money for three months, the so- called TED spread, widened to 2.12 percentage points from 2008's low of 76 basis points set in May. The spread increased to 4.64 percentage points on Oct. 10, the most since Bloomberg began compiling the data in 1984.
``There will be stress in the capital markets for a number of months,'' Paulson said yesterday in Washington.
Strains on the country's budget will require the Treasury Department to sell $1.5 trillion in debt this fiscal year, which began Oct. 1, he said. The Treasury announced on Nov. 3 plans to borrow $550 billion in the current quarter and $368 billion in the January-March period.
To contact the reporters on this story: Dakin Campbell in New York at dcampbell27@bloomberg.net; Kim-Mai Cutler in London at kcutler@bloomberg.net.
