BLBG: Treasuries Gain, Yields Approach Record Lows as Stocks Decline
Treasuries rose, pushing yields toward record lows, as stocks slid and economists said government reports this week will show wholesale and consumer prices fell last month.
The U.S. recession is driving a “solid bid” in the Treasury market, Adam Carr, Sydney-based senior economist at ICAP Australia Ltd., part of the world’s largest inter-bank broker, wrote to clients today. The cost of protecting bonds in Asia from default rose, helping push up benchmark 10-year notes for a sixth day as investors sought the relative safety of government debt.
“We can’t be bearish” on Treasuries, said Kazuaki Oh’e, a debt salesman in Tokyo at CIBC World Markets Japan Inc., part of the investment division at Canada’s fifth-biggest bank. “We may have more bad news on the economy. We don’t have any fear of inflation and we may start thinking about deflation.”
The 10-year yield fell four basis points to 2.17 percent as of 2:21 p.m. in Tokyo, according to BGCantor Market Data. The price of the 3.75 percent security maturing in November 2018 rose 10/32, or $3.13 per $1,000 face amount, to 113 30/32.
The rate may drop to 2 percent this week, Oh’e said, surpassing the record of 2.04 percent set Dec. 18.
Yields on two-year notes slid two basis points to 0.69 percent, versus the record of 0.6 percent last month.
The MSCI Asia Pacific Index of regional shares slid 3.8 percent, its fifth decline in six days.
Default Swaps
Markit’s iTraxx Japan index of credit-default swaps rose 10 basis points to 3.045 percentage points, according to Credit Suisse Group AG. 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.
Prices paid to U.S. producers probably fell in December for a fifth month, economists said before the Labor Department report at 8:30 a.m. in Washington today. The estimated 2 percent drop, according to the median estimate of 77 economists in a Bloomberg News survey, would mark the longest decline since 1998.
Consumer prices fell 0.9 percent from the previous month, a separate survey showed before the Labor Department reports the figure tomorrow.
The difference between rates on 10-year Treasury Inflation Protected Securities, or TIPS, and conventional notes, which reflects the outlook among traders for consumer prices, narrowed to 46 basis points from 2.47 percentage points six months ago.
Deflation ‘Lurking’
Deflation is “lurking” in the U.S., Europe and Japan, Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo, wrote in a report today. U.S. 10-year yields will push toward 2 percent, he wrote. Mizuho’s U.S. arm is one of the 17 primary dealers authorized to trade with the Federal Reserve.
Deflation, a general decline in prices for goods and services, increases the purchasing power of the fixed payments from bonds.
In Australia, 10-year yields declined to a record after the government said unemployment rose to the highest in almost two years. The yield on the 5.25 percent bond due in March 2019 slid 15 basis points to 3.85 percent, the least since Bloomberg started tracking the data in 1969.
Japanese 10-year bonds gained, pushing yields down to 1.22 percent, to the lowest in more than a week, after a government report showed machinery orders fell in November.
President-elect Barack Obama’s plan to combat the recession may send Treasury prices lower this year as it spurs the economy, said Yasutoshi Nagai, chief economist in Tokyo at Daiwa Securities SMBC Co., part of Japan’s second-largest brokerage.
Stimulus Package
The U.S. stimulus package being negotiated in Congress will cost $850 billion, Rahm Emanuel, Obama’s chief of staff, said yesterday. Obama and lawmakers had previously been discussing a package of about $775 billion, which is in addition to a $700 billion plan passed under President George W. Bush.
“Obama’s fiscal policy will take effect around April,” Nagai said. “It will help the U.S. economy but it will be bad for the bond market. Treasury yields are too low to buy.”
Ten-year yields may rise to 4.2 percent by year-end, Nagai said. A Bloomberg survey of 58 economists projects 3.07 percent.
Yields suggest 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, narrowed to 0.99 percentage points from 2008’s high of 4.64 percentage points in October.
Confidence in the world economy rose in January from a near-record low, a survey of Bloomberg users on six continents showed. The Bloomberg Professional Global Confidence Index climbed to 8.7 from 6.1 in December. A reading below 50 means pessimists outnumber optimists.
Losses Wiped Out
Gains in Treasuries wiped out losses from earlier in the year, leaving them little changed so far in 2009, Merrill Lynch & Co.’s U.S. Treasury Master index shows. German bonds handed investors a loss of 0.1 percent, while Japanese government securities fell 0.4 percent.
Ten-year notes rose the most in almost a month yesterday as a report showing U.S. retail sales dropped for a sixth month in December fueled speculation the economic slump is deepening.
“Retail sales paint an extraordinarily weak picture for the U.S. economy,” Dan Orlando, head of U.S. government bond trading at Deutsche Bank Securities Inc., another primary dealer, said yesterday. “It probably limits the potential for a pullback in Treasuries.”
