BLBG: Treasuries Little Changed as Stocks Advance on Obama Pledge
By Daniel Kruger and Anchalee Worrachate
Dec. 8 (Bloomberg) -- Treasuries were little changed as stocks rose after President-elect Barack Obama pledged the biggest U.S. public works plan since the 1950s to stimulate economic growth, and the government prepared to auction debt.
The Treasury Department will announce today how much in 10- and three-year notes it will sell this week. Yields on two-, 10- and 30-year securities dropped to record lows last week. The Standard & Poor’s 500 Index advanced 2.9 percent, and the MSCI World Index of equities gained 4.5 percent.
“People are starting to get annoyed at these really low yields and are starting to stick their toe back in the equity market,” said Michael Franzese, head of government bond trading for Standard Chartered in New York. “Right out of the gate, you’re seeing equities do fairly well.”
The 10-year note yield declined three basis points, or 0.03 percentage point, to 2.67 percent at 10:19 a.m. in New York, after earlier touching 2.80 percent, according to BGCantor Market Data. The price of the 3.75 percent security due November 2018 advanced 9/32, or $2.81 per $1,000 face amount, to 109 10/32. The yield fell to 2.505 percent on Dec. 5, the lowest level since at least 1962, when the Federal Reserve’s daily records began.
The yield on the two-year note was 0.93 percent, after rising as high as 1.07 percent. It dropped on Dec. 5 to an all- time low of 0.77 percent.
This Week’s Auctions
The difference in yield, or spread, between two- and 10- year notes was little changed at 175 basis points. It has narrowed from 262 basis points on Nov. 13 as longer-dated yields fell more than shorter-dated yields on speculation the recession will cause inflation to slow.
Three-month bill rates were at 0.01 percent, the least since January 1940.
“The market may have to build a bit more concession for the three-year,” said Michael Pond, an interest-rate strategist in New York at Barclays Capital Inc., another primary dealer. “The past couple of weeks have shown that demand for the 10- year sector has been strong, and that may show up at the auction.”
The government sold $25 billion of three-year notes on Nov. 10 and $20 billion of 10-year notes Nov. 12.
‘Flash in the Pan’
“The market is taking a breather after a recent rally because Obama’s pledge lifted sentiment and boosted stocks,” said Kornelius Purps, an interest-rate strategist in Munich at Unicredit Markets and Investment Banking. “It’s likely to be a flash in the pan. A sustained turnaround in the bond market is not possible at this point. The economic outlook is gloomy.”
Treasuries are still headed for their best year since 2000 as rising unemployment and slowing economic growth led Obama to say the recession will get worse and “more aggressive steps” will be needed to counter the housing crisis.
Traders increased bets the Fed will lower its target rate on overnight loans between banks to 0.25 percent from 1 percent on Dec. 16 after companies cut workers at the fastest pace in 34 years in November. Futures contracts on the Chicago Board of Trade show 74 percent odds of a three-quarter-percentage point cut, up from 26 percent a week ago.
Fed Chairman Ben S. Bernanke said last week he has “limited” room to lower interest rates further and may use less conventional policies, such as buying Treasuries, to revive the economy.
‘Substantial Quantities’
One option is for the Fed to buy “longer-term Treasury or agency securities on the open market in substantial quantities,” Bernanke said. “This approach might influence the yields on these securities, thus helping to spur aggregate demand.”
Japan’s biggest bond investors say Obama has room to unleash a flood of Treasuries without driving up borrowing costs as he tackles the worst economy since World War II.
The U.S. is starting to look like Japan in the 1990s, when the Bank of Japan struggled to revive growth as the combination of deflation and recessions stranded the nation in the so-called Lost Decade. Yields on Treasuries are falling as the government sells a record amount of debt to prop up the American economy.
U.S. federal debt rose to about 36 percent of GDP in September from 32 percent in 2001, as President George W. Bush raised funds to spur the economy and pay for wars in Iraq and Afghanistan.
‘History Repeats Itself’
“History repeats itself,” said Hiroyuki Bando, chief manager for fixed income, equities and currencies in Tokyo at Mitsubishi UFJ Trust & Banking Corp., which manages the equivalent of $200 billion and invests on behalf of Japan’s biggest bank. “Based on our experience in Japan, the same thing will happen in the U.S. The U.S. has more room to borrow.”
Bando bought Treasuries, as did Mizuho Asset Management Co., which oversees $41.9 billion and bet all year that inflation in the U.S. will turn into deflation, buoying government debt. JPMorgan Asset Management Japan Ltd., part of the largest U.S. lender, is buying Treasuries, speculating the Fed will purchase the securities to keep yields down and spur the economy, just as the Bank of Japan did a decade ago.
Treasuries returned 11.7 percent this year, the most since a 13.3 percent gain in 2000, as investors sought the safest securities, according to Merrill Lynch & Co.’s U.S. Treasury Master Index. That compares with a 38 percent loss in the Standard & Poor’s 500 index, including reinvested dividends. European government bonds provided 9.1 percent and Japanese notes 2.1 percent.
To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; Anchalee Worrachate in London at aworrachate@bloomberg.net.
