BLBG: Treasuries Drop Before Debt Sales as U.S. Stock Futures Gain
By Lukanyo Mnyanda and Bob Chen
Dec. 10 (Bloomberg) -- Treasuries fell as $44 billion in note sales this week and gains in U.S. stock-index futures damped demand for government debt.
The declines pushed yields higher for a second day this week as the U.S. Treasury prepared to auction $28 billion of three-year notes today and $16 billion of 10-year securities tomorrow.
“Today’s action is related to the stocks rally, which generally means a sell-off in Treasuries,” said Giuseppe Maraffino, a bond strategist in Milan at UniCredit Markets & Investment Banking, a unit of Italy’s largest bank. “The supply factor should also affect bonds.”
The yield on the benchmark 10-year note rose six basis points, or 0.06 percentage point, to 2.71 percent at 7:54 a.m. in New York, according to BGCantor Market Data. The price of the 3.75 percent security due in November 2018 fell 1/2, or $5 per $1,000 face amount, to 109 1/32. The yield on the two-year note gained six basis points to 0.90 percent.
Investors should favor longer-dated bonds to take advantage of higher yields and as the deepening economic slump pushes inflation lower, said Maraffino, without providing a specific yield forecast.
The rate on three-month bills was 0.01 percent. It was minus 0.01 percent yesterday as investors sought the safety of government securities with the shortest maturities toward year- end. The Treasury sold $27 billion of the securities on Dec. 8 at a high discount rate of 0.005 percent, the lowest since it started auctioning them in 1929.
TED Spread
Demand for U.S. notes was also eroded on the narrowest TED spread in two weeks, an indication banks are less reluctant to lend to each other. The difference between what banks and the Treasury pay to borrow money for three months fell nine basis points to 209 basis points. It widened to as much as 464 basis points on Oct. 10 and averaged 38 basis points in the year before the credit crunch began in August 2007.
Treasuries have returned almost 12 percent this year, according to Merrill Lynch & Co. indexes. The three-month bill rate declined from 3.24 percent at the end of 2007, while the yield on the benchmark 10-year note fell from 4.02 percent.
“There could be some unwinding of positions because the yield right now is too low to buy,” said Yasutoshi Nagai, chief economist in Tokyo at Daiwa Securities SMBC Co., part of Japan’s second-largest brokerage. Demand for bonds will remain low as long as the 10-year yield stays below 3 percent, he said.
Stock Gains
Japan’s Nikkei 225 Stock Average advanced for a third day as congressional Democrats and White House negotiators agreed on the outlines of a $15 billion plan to give General Motors Corp. and Chrysler LLC federal loans to stay in business. The MSCI World Index of stocks rose 0.4 percent and futures on the Standard & Poor’s 500 Index increased 1.5 percent.
Japanese bonds declined on concern the government will sell additional debt next fiscal year to compensate for a shortfall in tax revenue and to finance economic stimulus packages. The yield on the benchmark 10-year bond due in December 2018 rose two basis points to 1.41 percent in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker.
The decline in Treasuries may be limited after the cost of protecting corporate bonds in Europe and the Asia-Pacific region from default rose, analysts said.
Negative Sentiment
Sentiment among investors in Treasury notes turned negative this week for the first time in four months, a survey of clients by JPMorgan Securities Inc. showed yesterday.
The weekly survey showed the net percentage of investors betting on rising U.S. note prices fell to minus 6 percent as of Dec. 8, from 13 percent the previous week. The figure is the difference between the percentage of investors holding long positions, or bets on higher prices, and those taking short positions, bets on falling prices.
The U.S. may sell as much as $1.5 trillion in debt as the budget deficit approaches $1 trillion in the 2009 fiscal year, according to Bank of America Corp.
“Risk appetite will remain low as we go toward year-end,” wrote Wilson Chin, a fixed-income strategist in Amsterdam at ING Groep NV, in a note today. “There’s still demand at the short end of the curve, and I expect the auctions to go pretty well.”
The Federal Reserve may issue debt for the first time and has approached Congress, the Wall Street Journal reported, citing officials familiar with the situation. Officials are considering issuing Fed debt to help it manage trillions of dollars of lending and investing, the newspaper said.
To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Bob Chen in Hong Kong at bchen45@bloomberg.net
