BLBG: Treasuries Rise, Trimming Monthly Loss, Before Report on GDP
Treasuries rose, trimming the steepest monthly loss in almost five years, before a government report that economists say will show U.S. gross domestic product contracted at the fastest pace since 1982.
Ten-year and 30-year bonds led the gains as the cost of protecting corporate bonds from default climbed and stocks in Asia and Europe slid, helping fuel demand for the relative safety of government debt. The world’s biggest economy probably shrank at a 5.5 percent annual rate from October through December, according to a Bloomberg News survey.
“The economic troubles are deep,” said Christoph Kind, head of asset allocation in Frankfurt at Frankfurt-Trust, which oversees about $23.2 billion. “We are still a long way away from recovery, and I would rather stay with safe assets. Any optimism we saw recently is based on hopes and experience that at some point things have to turn around. But we don’t have any concrete evidence yet to back that up.”
The 10-year yield declined two basis points to 2.84 percent at 7:33 a.m. in New York, according to BGCantor Market Data. The 3.75 percent security maturing in November 2018 rose 6/32, or $1.88 per $1,000 face amount, to 107 23/32. A basis point is 0.01 percentage point. The yield on the 30-year bond fell four basis points to 3.58 percent.
The yield on the 10-year note climbed from a record low of 2.04 percent on Dec. 18. It averaged 4.56 percent this decade.
The advance in yields is an opportunity to buy, Richard Bernstein, Merrill’s chief investment strategist in New York, wrote in a report yesterday. The U.S. economy will contract 1.5 percent this year, according to a Bloomberg survey of economists.
The MSCI World Index of shares fell 1.1 percent.
Default Swaps
Contracts on the Markit iTraxx Crossover Index of 50 European companies with mostly high-risk, high-yield credit ratings increased 17 basis points to 1,062, according to JPMorgan Chase & Co. prices at 8:26 a.m. in London. The index is a benchmark for the cost of protecting bonds against default and an increase signals a deterioration in the perception of credit quality.
Treasuries fell 2.96 percent in January as of yesterday, heading for the biggest monthly loss since April 2004, according to Merrill’s U.S. Treasury Master index.
The securities declined as President Barack Obama’s government sold $78 billion of notes this week, as the U.S. government borrows record amounts to try to end the recession.
‘Bearish’
“I tend to be bearish,” said Xin Li, who trades Treasuries in Hong Kong for Industrial & Commercial Bank of China Ltd., China’s biggest lender. “The U.S. economy may recover a little bit.”
Ten-year yields will rise to 3 percent in the second half of 2009, Li said. A Bloomberg survey of economists projects the rate will climb to 3.02 percent by Dec. 31, with the most recent forecasts given the heaviest weightings.
Obama is depending on Asian investors to help pay for his spending plans.
Chinese funds own $681.9 billion of the $5.8 trillion in U.S. marketable debt, making them the largest holders outside the nation, Treasury Department data show. Japanese investors are next with $577.1 billion.
The U.S. will probably borrow $2.5 trillion this fiscal year ending Sept. 30, almost triple the $892 billion in notes and bonds sold the prior 12 months, according to Goldman Sachs Group Inc., also a primary dealer.
Yields suggest there is a revival in credit markets even as the International Monetary Fund predicts that world growth will stagnate this year.
TED Spread
The so-called TED Spread that measures the difference between what banks and the U.S. government pay for three-month loans, was 0.98 percentage point, near the lowest since July. It was as high as 4.64 percentage points in October, following the collapse of Lehman Brothers Holdings Inc. the month before.
The London interbank offered rate, or Libor, for three- month dollar loans, rose one basis point to 1.18 percent. It was 4.82 percent in October, versus an average of 3.72 percent for the past five years.
U.S. high-yield, high-risk securities returned 5.7 percent this month, the best start to a year since 2001, Merrill’s indexes show. The bonds are rated below Baa3 by Moody’s and BBB- by Standard & Poor’s.
Rates on three-month U.S. bills, considered among the safest securities because of their short maturities, fell one basis point to 0.21 percent.
Target Rate
The Federal Reserve cut its target rate for overnight lending between banks to a range of zero percent to 0.25 percent last month, and is adding cash to the financial system to try to restore bank lending.
The policy still hasn’t succeeded in reducing consumer lending rates to near government borrowing costs. The gap between 30-year mortgage rates and 10-year Treasury yields is about 2.28 percentage points, up from 1.55 percentage points five years ago.
“The markets aren’t well, but they’re certainly going in the direction we’d like to see,” said Milton Ezrati, senior economist and strategist at Jersey City, New Jersey-based Lord Abbett & Co., which manages $75 billion.
The Fed’s cash additions are raising concern that inflation will quicken.
The difference between rates on 10-year notes and Treasury Inflation Protected Securities, or TIPS, which reflects the outlook among traders for consumer prices, widened to 1.09 percentage points today, the most in more than three months.
Treasury bulls say the recession is reason enough to buy.
Mitsubishi UFJ’s Yamamoto said he’s avoiding corporate bonds because company earnings may fall. Eastman Kodak Co., the photography company based in Rochester, New York, said yesterday it will cut as many as 4,500 jobs after reporting a loss.
