BLBG: Treasuries Decline as Obama’s Stimulus Push Boosts Equities
Treasuries fell for a third day on speculation Congressional efforts to spur the U.S. economy will help the nation snap a recession, boosting investor appetite for stocks and corporate debt.
Wall Street’s biggest bond firms say Treasuries will decline for the first time in a decade in 2009 as the flight to safety that drove the biggest returns since 1995 fades. President-elect Barack Obama is pushing for tax cuts that may exceed $300 billion in a stimulus package he’s asking Congress to pass within several weeks, a Democratic aide says.
“The economic stimulus plan will help stocks and hurt bonds,” said Hiroyuki Bando, chief manager for fixed income, equities and currencies in Tokyo at Mitsubishi UFJ Trust & Banking Corp., which oversees the equivalent of $200 billion and invests on behalf of Japan’s biggest bank. “It’ll be hard for 10-year yields to fall.”
The 10-year note’s yield increased six basis points to 2.41 percent as of 1:19 p.m. in Tokyo, according to BGCantor Market Data. The price of the 3.75 percent security maturing in November 2018 slid 19/32, or $5.94 per $1,000 face amount, to 111 23/32. A basis point is 0.01 percentage point.
The yield will be about 2.5 percent this month, Bando said. A Bloomberg survey of banks and securities companies projects 3.37 percent by year-end, with the most recent forecasts given the heaviest weightings. Two-year yields climbed two basis points to 0.85 percent.
The MSCI Asia Pacific Index of regional shares rallied 1.2 percent today, its eighth straight gain.
The yen fell for a fourth day against the dollar on speculation investors will seek higher-yielding assets. Japan’s currency weakened to 92 a dollar from 91.83 on Jan. 2.
Dealer Survey
U.S. 10-year notes may lose 3.1 percent this year, the first loss since declining 8.3 percent in 1999, based on the median forecast of the 17 primary government security dealers that trade with the Federal Reserve. After last year’s rally, yields are so low that coupon payments can’t make up for any drop in bond prices, they said.
Treasuries returned 14 percent in 2008, according to Merrill Lynch & Co.’s U.S. Treasury Master index.
“We could start to see stability sooner than the market would otherwise expect,” said William O’Donnell, a U.S. government bond strategist at UBS Securities LLC in Stamford, Connecticut, one of the dealers and a unit of Switzerland’s biggest bank. “As the pendulum swings from risk aversion to risk seeking that will reduce Treasury demand.”
Fund managers surveyed by Ried, Thunberg & Co. were the most pessimistic on record about Treasuries, based on a survey of expectations for the end of June. The sentiment index dropped to 35 for the seven days ended Jan. 2 from 36 the week before. The economic analysis firm in Jersey City, New Jersey, surveyed 22 fund managers controlling $1.18 trillion. A reading below 50 means investors expect prices to fall.
Default Risk
Democrats are scheduled to start drafting the biggest economic-recovery package in U.S. history this week, which may grow to $1 trillion. The Bush administration agreed last month to give General Motors Corp., which manufacturers Hummers and Saturns, and Chrysler LLC, maker of the Town and Country minivans, $13.4 billion in federal loans to avert bankruptcy.
“If we don’t act swiftly and boldly, we could see a much deeper economic downturn that could lead to double-digit unemployment,” Obama said Jan. 3 in his weekly radio address.
The cost of protecting investors from defaults on corporate and government bonds in Asia and the Pacific declined, according to traders of credit-default swaps.
The Markit iTraxx Japan index of credit-default swaps fell 10 basis points to 2.76 percentage points, BNP Paribas SA prices show. 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.
TED Spread
Yields indicate banks are becoming more willing to lend. The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, shrank to 1.34 percentage points from 2008’s high of 4.64 percentage points.
Bond bulls are sticking to the view that investors will seek the relative safety of Treasuries as the U.S. economy shrinks.
“Treasury yields will fall for the first half of the year,” said Satoshi Arai, chief portfolio investor at Toyota Asset Management Co. in Tokyo, a unit of Japan’s largest automaker with $12 billion in assets. “Employment will get worse. Consumer spending will fall. This will be a long recession.”
Ten-year yields will be under 2 percent and two-year yields will be roughly 0.5 percent for the first six months of 2009, Arai said.
The U.S. probably lost more jobs in 2008 than in any year since the end of World War II, a government report may show. Payrolls fell 500,000 in December, bringing last year’s decline to 2.4 million, the most since 1945, according to the median estimate of economists surveyed by Bloomberg News ahead of Labor Department figures due Jan. 9.
The Treasury Department is selling record amounts of securities to pay for the government’s spending plans. It estimated it will auction as much as $2 trillion of debt this fiscal year, which began Oct. 1. U.S. marketable debt climbed to $5.82 trillion in November, the most ever, from $4.54 trillion a year earlier.
The U.S. is scheduled to sell $8 billion of 10-year Treasury Inflation Protected Securities tomorrow. It plans to announce today the size of conventional three- and 10-year auctions scheduled for later in the week.
The difference between rates on 10-year TIPS and conventional notes, which reflects the outlook among traders for consumer prices, narrowed to 13 basis points from 2.61 percentage points six months ago.
