BLBG: Treasuries Advance as Consumer Prices May Fall Most Since 1949
By Kim-Mai Cutler and Wes Goodman
Nov. 19 (Bloomberg) -- Ten- and 30-year Treasury bonds rose, while yields indicated inflation expectations are the lowest in at least a decade, before a government report that may show consumer prices fell the most since 1949.
Two-year yields were near levels not seen since 2003 as traders raised bets the Federal Reserve will cut interest rates to spur the U.S. economy. The difference between yields on 10- year Treasury Inflation Protected Securities and conventional notes, which reflects the outlook for consumer prices, was 56 basis points. The spread narrowed to 54 basis points yesterday, the least since Bloomberg data began in 1998.
“There’s a degree of value-hunting and investors are moving back out into longer-dated bonds,” said Charles Diebel, head of European interest-rate strategy at Nomura International Plc in London. “A Fed rate cut is pretty aggressively priced.”
The benchmark 10-year yield fell five basis points to 3.48 percent as of 10 a.m. in London according to BGCantor Market Data. The 3.75 percent security maturing in November 2018 rose 13/32, or $4.06 per $1,000 face amount, to 102 10/32, gaining for a fourth day.
The yield on the two-year note increased 1 basis point to 1.14 percent. The 30-year bond yield declined 2 basis points to 4.09 percent.
U.S. consumer prices probably dropped 0.8 percent last month, the most since 1949, after stagnating in September, according to the median estimate in a Bloomberg News survey. The Labor Department releases the figure at 8:30 a.m. in Washington.
Rate Cut, Recession
Futures on the Chicago Board of Trade show an 88 percent chance the central bank will reduce its target rate for overnight bank loans by 50 basis points to 0.5 percent at its Dec. 16 meeting, as of yesterday in New York. The odds of a 75- basis-point cut rose to 12 percent, from zero the previous day. A basis point is 0.01 percentage point.
The breakeven rate on two-year notes, which show the difference in yield between inflation-protected bonds and nominal bonds, are below zero. They fell to a negative 3.57 percentage points today, suggesting traders are betting slumping economic growth may lead to deflation over the next two years.
“It is especially interesting whether or not a shift in inflation to deflation concerns is in the making at the Fed,” wrote Peter Mueller, a Frankfurt-based fixed-income strategist at Commerzbank AG. “Even the vaguest hint such a shift is taking place would signal the Fed is willing to cut the federal funds rate to 0 percent if necessary.”
Yield Spread
The difference in yield between two- and 10-year notes narrowed for a fourth day, reflecting bets that lower inflation expectations will support real returns in longer-dated bonds.
Barack Obama will take office in January during a global recession that has led investors to shun all but the safest assets. The U.S. economy will contract 2.05 percent in the fourth quarter and 0.9 percent in the first three months of 2009, according to a Bloomberg News survey of economists.
Target Corp., the second-largest U.S. discount chain, said it plans to offer larger discounts to draw shoppers.
Housing starts dropped to a 780,000 annual pace in October, the lowest level since records began in 1959, economists said. The report is due at 8:30 a.m. in Washington.
Treasuries returned 7.4 percent this year, while German government bonds handed investors 8.1 percent and Japanese sovereign securities earned 1.4 percent, according to indexes compiled by Merrill Lynch & Co.
Failed Trades
Demand for U.S. sovereign debt caused an increase in failed trades in the weeks following the Sept. 15 collapse of Lehman Brothers Holdings Inc. Uncompleted trades reached a record in October.
CME Group Inc. in Chicago, the world’s largest futures and options exchange, said yesterday firms should be prepared to deliver Treasury futures contracts that expire next month. The exchange will take “disciplinary action” against firms that fall short of their delivery obligations, the CME said.
Corporate bonds handed investors a 15 percent loss so far in 2008, heading for their worst year since Merrill Lynch started compiling the figures in 1997, as the U.S, Europe and Japan slipped into recessions.
The cost of protecting European companies’ bonds from default climbed, according to traders of credit-default swaps. The Markit iTraxx Crossover index rose 10 basis points to 886 percentage points, according to JPMorgan Chase 7 Co.
Yields indicate banks are less willing to lend than earlier in the year. The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, widened to 2.10 percentage points from 2008’s low of 76 basis points set in May.
European and Asian stocks declined, sapping demand for higher-yielding assets. The Dow Jones Stoxx 600 Index lost 1.5 percent while the MSCI Asia Pacific Index of regional shares slid 0.9 percent, dropping for a third day.
To contact the reporters on this story: Kim-Mai Cutler in London at kcutler@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net
