BLBG: Treasury Two-Year Yield Near Three-Week High Before Record Sale
Two-year Treasuries were little changed, with yields near the highest level in three weeks, before the U.S. sells $70 billion in debt to rescue the economy.
Government securities tumbled 2.2 percent in January, heading for their biggest monthly loss in almost five years, according to Merrill Lynch & Co.’s U.S. Treasury Master index. Timothy Geithner, who was sworn in as Treasury secretary yesterday in Washington, will oversee an unprecedented increase in borrowing, starting with a $40 billion sale of two-year notes today and a $30 billion auction of five-year debt on Jan. 29, both records.
“The underlying issue is supply,” said Giles Gale, a London-based fixed-income strategist at Royal Bank of Scotland Group Plc, the world’s fourth-biggest bond trader. “Investors are really tuned into it at the moment.”
Two-year notes yielded 0.85 percent as of 7:07 a.m. in New York, according to BGCantor Market Data. The 0.875 percent security maturing in December 2010 traded at 100 1/32. While yields are rising, they are below the five-year average of 3.46 percent.
The last sale of two-year securities on Dec. 22 yielded 0.922 percent. Investors bid for 2.13 times the amount offered at the auction. The average for the past 10 sales is 2.31.
Ten-year yields fell two basis points to 2.63 percent today. A basis point is 0.01 percentage point.
Rising Borrowing
Goldman Sachs Group Inc., one of the 17 primary dealers that underwrite the government debt, said last week the U.S. will probably borrow a record $2.5 trillion this fiscal year ending Sept. 30, versus $892 billion in notes and bonds sold in the prior 12 months.
The MSCI World Index of shares rose 0.5 percent, denting demand for the safety of government assets.
The last time Treasuries fell so much was in April 2004, handing investors a 3.2 percent loss, according to the Merrill Lynch index. Debt declined that month as signs of accelerating inflation led traders to increase bets the Federal Reserve would raise interest rates.
Inflation expectations increased this month as President Barack Obama sought approval in Congress for his $825 billion economic plan.
The difference between rates on 10-year notes and Treasury Inflation Protected Securities, which reflects the outlook among traders for consumer prices, widened to 77 basis points from minus eight basis points in November. The average for the past decade is 2.11 percentage points.
Real Yield
The real yield, what investors get after inflation is taken into account, was 2.56 percent on 10-year notes, near the highest level in 16 months. Consumer prices increased 0.1 percent in 2008, after rising 4.1 percent the previous year.
Two-year yields were within a quarter of a percentage point of the record low set last month as traders bet the Fed will refrain from raising interest rates when it completes a two-day meeting tomorrow.
Fed Chairman Ben S. Bernanke trimmed the target for overnight lending between banks to a range of zero to 0.25 percent at the last meeting on Dec. 16 to spur the economy. Traders see 86 percent odds that policy makers will keep the range unchanged this week, and no chance of an increase, futures contracts on the Chicago Board of Trade show.
Consumer Confidence
The Conference Board index of consumer sentiment was probably near its lowest ever in January, and figures from S&P/Case-Shiller will show the decline in home values accelerated in November, according to Bloomberg News surveys of economists before the reports today.
Caterpillar Inc., Sprint Nextel Corp., Home Depot Inc. and ING Groep NV all announced job cuts yesterday.
“The economy will recover, but not strongly,” said Shuhei Mochizuki, Tokyo-based assistant manager in the foreign-bond section at Sumitomo Life Insurance Co., which oversees the equivalent of $33.6 billion in non-Japanese debt. “People are buying Treasuries for safety.”
Ten-year yields will fall to 2 percent by year-end, he said.
Yields indicate central bank and government attempts to restore trading in frozen credit markets haven’t been as effective this year as in 2008, providing further reason to favor the relative safety of government debt.
The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, fell four basis points today to 1.05 percentage points. It was 4.64 percentage points on Oct. 10, the most since Bloomberg began compiling the data in 1984.
Mortgage Rates
The London interbank offered rate, or Libor, for three- month dollar loans was little changed at 1.18 percent today.
Even as the Fed cut its target interest rate, 30-year fixed-rate mortgages averaged 5.12 percent last week, according to mortgage finance company Freddie Mac in McLean, Virginia, or 2.50 percentage points more than 10-year Treasuries. The spread averaged about 1.86 percentage points since the start of 2000.
In short-term lending, the $1.69 trillion commercial paper market may be the first to cut its reliance on federal bailout programs.
About $245 billion of 90-day commercial paper that companies sold to the Fed starting in October will mature this week and next, central bank data show. As much as $50 billion to $70 billion of the debt may be rolled over and bought by investors, according to Barclays Capital in New York.
