BLBG: Treasuries Rise, Yields Near Record Lows; Spending May Decline
By Wes Goodman
Nov. 26 (Bloomberg) -- Treasuries rose, with yields near record lows, before a U.S. report that economists say will show consumer spending dropped last month by the most since the September 2001 terrorist attacks.
Government securities returned 4.7 percent in November, heading for their biggest monthly gain since 1985, according to Merrill Lynch & Co.’s U.S. Treasury Master index, as a seizure in credit markets caused stocks to tumble. The deepening U.S. economic contraction prompted the Federal Reserve to commit up to $800 billion yesterday in a second stimulus plan, aiming to revive lending to homeowners, consumers and businesses.
“The economy is still in a recession and the stock market is still at a low point,” said Kevin Yang, who oversees $1 billion of Treasuries at Shinkong Life Insurance Co. in Taipei, Taiwan’s second-largest life insurer. “I plan to buy if yields rise.”
The yield on the benchmark 10-year note fell two basis points to 3.10 percent as of 2:24 p.m. in Tokyo, according to BGCantor Market Data. The price of the 3.75 percent security maturing in November 2018 rose 5/32, or $1.56 per $1,000 face amount, to 105 17/32.
The rate declined to 2.99 percent on Nov. 20, the lowest since Fed records of the figure started in 1962. Yang said he may buy if the yield climbs to 3.3 percent. Two-year rates were little changed at 1.18 percent.
Personal Spending
Personal spending, the biggest part of the economy, fell 1 percent after sliding 0.3 percent in September, according to the median forecast in a Bloomberg News survey of economists before the numbers from the Commerce Department. Orders for durable goods, sales of new houses and consumer confidence also declined, other reports today may show.
U.S. government debt has returned 9.3 percent this year, versus 9.7 percent in Germany and 1.8 percent in Japan, the Merrill figures show.
Corporate bonds in the U.S. handed investors a 16 percent loss, while the Standard & Poor’s 500 Index slid 42 percent. The MSCI Asia Pacific Index of regional shares fell 0.4 percent today, following a 4.1 percent rally yesterday.
President-elect Barack Obama and Timothy Geithner, his choice for Treasury secretary, are going to take over an economy that will shrink 2.05 percent this quarter, based on a Bloomberg survey of banks and securities companies. That would be the largest contraction in almost two decades.
‘Risk Appetite’
Zale Corp., the biggest U.S. jewelry chain by stores, yesterday scrapped its annual forecast, saying in a statement that it “does not believe it can reliably gauge likely holiday performance or sales.”
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 2.09 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.
Government efforts to spur the U.S. economy may begin to unlock credit markets and revive consumer spending, said Mary Miller, director of fixed income at T. Rowe Price Group Inc., the Baltimore-based money manager that oversees $340 billion.
“Let’s get through the end of the year and then come into 2009 and I think there will be a bit more risk appetite for investors,” Miller said yesterday in an interview with Bloomberg Television in New York. “Treasuries are overvalued because of the flight to quality. Treasury yields will start to rise.”
Default Risk
The cost of protecting investors in Asian and Australian bonds from default declined, according to traders of credit- default swaps. The Markit iTraxx Australia index fell 25 basis points to 3.05 percentage points, according to Citigroup Inc. 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.
Government debt rallied yesterday because the Fed’s plan includes purchases of as much as $600 billion in mortgages, spurring demand for sovereign securities as a replacement for bonds backed by home loans that may be retired early.
“By buying Treasuries, you are buying something that is not prepayment-affected,” said Stephen Van Order, a debt strategist in Bethesda, Maryland, at Calvert Asset Management, which oversees $10 billion in bonds. “So you buy some Treasuries” and rebuild the average life of your portfolio.
To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.
