BLBG: Treasuries Rise, Yields Near Record Lows; Spending May Decline
By Gavin Finch
Nov. 26 (Bloomberg) -- Treasuries rose for a second day before a U.S. government report forecast to show consumer spending dropped last month by the most since the September 2001 terrorist attacks.
The advance pushed the yield on the 10-year note to near a record low as stock losses in Asia and Europe stoked demand for the safest assets. Treasuries rallied yesterday as the deepening U.S. recession prompted the Federal Reserve to commit $800 billion in a second stimulus plan. Reports also showed the economy contracted more than the government initially estimated in the third quarter and housing prices plunged.
“The outlook for Treasuries is very good,” said Peter Mueller, a Frankfurt-based fixed-income strategist at Commerzbank AG, Germany’s second-biggest lender. “It’s becoming increasingly clear the U.S. is going into a deep recession while the Fed” pumps trillions of dollars into the economy, he said.
The yield on the benchmark 10-year note fell 11 basis points to 3.01 percent as of 7:15 a.m. in New York, according to BGCantor Market Data. The 3.75 percent security maturing in November 2018 rose 31/32, or $9.69 per $1,000 face amount, to 106 12/32.
The yield declined to 2.99 percent on Nov. 20, the lowest level since Fed records on the security started in 1962. It will be at about 3 percent by year-end, Mueller said. The two-year note yield slid six basis points to 1.11 percent.
Consumer Spending
Personal spending, the biggest part of the economy, fell 1 percent after sliding 0.3 percent in September, according to a Bloomberg survey of economists. Orders for durable goods, sales of new houses and consumer confidence also declined, other reports may show.
“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.”
Treasuries rallied yesterday as the Fed’s commitment to purchase mortgages spurred demand for sovereign securities as a replacement for bonds backed by home loans that may be repaid 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.
Yield Spread
The difference in yield, or spread, between two- and 10- year notes narrowed by 4 basis points to 189 basis points today, from 262 basis points on Nov. 13, the widest in more than five years. A flattening of the so-called yield curve, a chart of debt maturities, indicates investors favor longer-dated debt on speculation inflation will be subdued as the economy contracts.
“The Fed only has a little bit more room to cut” rates, Laurence Mutkin, head of asset allocation in London at Morgan Stanley, said in Bloomberg Television interview. “Yesterday’s action demonstrated an implicit willingness to go farther than that and act in the bond market to keep longer-term yields low.”
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 208 basis points from 2008’s low of 76 basis points set in May. The spread increased to 464 basis points on Oct. 10, the most since Bloomberg began compiling the data in 1984.
Libor Climbs
The three-month London interbank offered rate, or Libor, that banks charge each other for dollar loans snapped three days of increases, falling to 2.18 percent. Tokyo’s three-month interbank lending rate climbed for a 13th day to 0.858 percent, the highest level this month.
Investors seeking the safest assets pushed yields on three- month Treasury bills down to 0.10 percent. The rate was as low as 0.01 percent on Nov. 21.
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.
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.
‘Flight to Quality’
“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.”
The cost of protecting European corporate bonds from default rose today, according to traders of credit-default swaps.
Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-risk, high-yield credit ratings increased 9 basis points to 884, according to JPMorgan Chase & Co. prices. The index is a benchmark for the cost of protecting bonds against default and a rise indicates a deterioration in the perception of credit quality.
U.S. 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. They returned 9.3 percent this year, versus 9.7 percent in Germany and 1.8 percent in Japan, the Merrill figures show.
Europe’s Dow Jones Stoxx 600 Index slid 1.4 percent. Futures on the Standard & Poor’s 500 Index lost 1.2 percent. The MSCI World Index fell 0.7 percent.
To contact the reporter on this story: Gavin Finch in London at gfinch@bloomberg.net
