BLBG: Treasuries Little Changed After Losing Week on Supply Outlook
Treasuries were little changed, after falling for the first week since October, on speculation a record decline in yields will curb demand as the U.S. increases its debt sales.
A survey of fund managers by Ried, Thunberg & Co. shows the company’s sentiment index toward Treasuries for the end of June fell to the lowest for 2008. The index dropped to 36 for the seven days ended Dec. 26 from 39 the week before. Ried, in Jersey City, New Jersey, surveyed 24 fund managers controlling a total of $1.24 trillion.
“Yields are too low to buy,” said Yasutoshi Nagai, chief economist at Daiwa Securities SMBC Co. in Tokyo, part of Japan’s second-largest brokerage. “In the latter half of 2009, the housing market will pick up. The economy will turn positive,”
Investors should buy corporate bonds and stocks and sell Treasuries because economic growth will curb demand for the relative safety of government debt, Nagai said.
The 10-year note yield rose one basis point to 2.14 percent as of 12:23 p.m. in Tokyo, according to BGCantor Market Data. The price of the 3.75 percent security maturing in November 2018 fell 3/32, or 94 cents per $1,000 face amount, to 114 8/32.
The yield on the three-month bill, seen as among the safest securities because of its short maturity, increased seven basis points to 0.06 percent. The figure matched the highest level this month.
The 14-day relative-strength index for the 10-year note yield was 26. Readings below 30 indicate yields will probably rise and prices, which move in the opposite direction, will fall. Figures above 70 show the opposite. The index, a gauge of momentum used by traders to predict changes in price, has been below 30 for two weeks.
Funding Needs
The U.S. sold a record $66 billion of two- and five-year notes last week, highlighting the government’s funding needs amid a deepening recession.
The securities drew historic low yields as the Treasury faces selling what it has estimated will be as much as $2 trillion in debt this fiscal year. The U.S., strapped with a swelling budget deficit, needs to finance a bailout of the banking system and an economic stimulus plan that members of President-elect Barack Obama’s transition team said may cost $850 billion.
The Treasury auctioned $28 billion of five-year notes on Dec. 23 at a yield of 1.539 percent and $38 billion of two-year notes the previous day at a yield of 0.922 percent.
Annual Gains
Losses are trimming annual gains even as Merrill Lynch & Co.’s U.S. Treasury Master index shows Treasuries are headed for their best year since 1995.
U.S. government securities returned 14.6 percent in 2008, versus 12.1 percent in Germany and 3.4 percent in Japan, Merrill’s indexes show.
The world’s biggest bond investors are betting European Central Bank President Jean-Claude Trichet will be forced to follow Federal Reserve Chairman Ben S. Bernanke and step up the pace of interest-rate cuts.
BlackRock Inc., Schroder Investment Management and Standard Life Investments Ltd., which together oversee $1.6 trillion, are buying German debt securities even though yields are close to record lows. Barclays Capital, the top primary dealer of German debt, says bunds offer “unprecedented value” because the ECB will accelerate rate cuts as the economic slump deepens.
Behind The Curve
“It still makes sense to be long selective markets and Europe is one of those,” said Michael Krautzberger, a European fund manager in London at BlackRock, which manages $1.3 trillion. “The ECB is behind the curve.”
While the Fed reduced its target rate 4.25 percentage points this year to as low as zero, and the Bank of England cut its benchmark by 3.5 percentage points to 2 percent, the Frankfurt-based ECB lagged behind.
The ECB lowered the main refinancing rate by 1.5 percentage points to 2.5 percent and will cut the benchmark rate 1 percentage point to 1.5 percent by June, based on the median of 15 economists’ forecasts compiled by Bloomberg.
Treasuries surged as the U.S. fell into recession. Home prices for the 20 largest metropolitan areas fell 17.8 percent in October from a year earlier, the biggest decline since record keeping began in 2001, according to a Bloomberg News survey of economists before the S&P/Case-Shiller index is published tomorrow.
The Institute for Supply Management’s December factory index dropped to 35.4, the lowest reading in almost three decades, a separate Bloomberg survey shows. The ISM report is due Jan. 2.
The MSCI Asia Pacific Index of regional shares fell 0.2 percent, snapping two days of gains.
End In Sight
The U.S. recession will end in about the middle of 2009, said Holger Schmieding, chief European economist at Bank of America in London, one of 17 primary dealers that trade with the Federal Reserve.
“Interest rates are extremely low,” Schmieding said in an interview Dec. 26. “Much lower oil prices are supporting the spending power of consumers.”
Crude oil for February delivery recently traded at $39.23 a barrel in after-hours electronic trading on the New York Mercantile Exchange, having tumbled from a record $147.27 reached in July.
Yields indicate banks are more 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, narrowed to 1.41 percentage points from 2008’s high of 4.64 percentage points in October.
