BLBG: Treasuries Rise as Yield Gains Spur Demand Before Record Sales
Treasuries rose on speculation yields near a 10-week high and deepening job losses will boost demand at a record package of U.S. note and bond sales this week.
China’s loss of more than $5 billion on the $10.5 billion it invested in New York-based Blackstone Group LP, Morgan Stanley and TPG Inc. since mid-2007 may increase its appetite for the relative safety of Treasuries as the U.S. economy shrinks. The U.S. plans to sell $32 billion of three-year notes tomorrow, $21 billion of 10-year securities on Feb. 11 and $14 billion of 30- year bonds Feb. 12.
“Treasuries offer value,” said Peter Jolly, head of market research at National Australia Bank Ltd.’s investment-banking unit in Sydney. “The economy is softening and the inflation rate is falling.”
The 10-year note’s yield fell three basis points to 2.97 percent as of 12:43 p.m. in Tokyo, according to BGCantor Market Data. The price of the 3.75 percent security due in November 2018 rose 7/32, or $2.19 per $1,000 face amount, to 106 19/32. The yield touched 3 percent on Feb. 6, a level not seen since Nov. 28.
Ten-year yields, which slid to a record low of 2.04 percent on Dec. 18, have averaged 4.55 percent this decade. They will fall to 2.6 percent by the end of March, Jolly said. A Bloomberg survey of economists shows the same. The figure will be at 2.58 percent by June 30, the survey shows, with the most recent forecasts given the heaviest weightings.
IMF, Depression
Notes also gained after International Monetary Fund Managing Director Dominique Strauss-Kahn said advanced economies are in a “depression.”
“The worst cannot be ruled out,” Strauss-Kahn said Feb. 7 in Kuala Lumpur, where he was attending a gathering of central bankers from Southeast Asia. “There’s a lot of downside risk.”
General Motors Corp., trying to cut enough costs by a March 31 deadline to keep $13.4 billion in U.S. aid, is readying a plan to fire thousands of salaried employees, people familiar with the plans said. The U.S. lost 598,000 jobs in January, the most since December 1974, a Labor Department report showed on Feb. 6.
President Barack Obama is growing increasingly reliant on international investors to finance his $780 billion stimulus plan and keep Treasury yields and market interest rates down.
While 10-year yields rose 5 basis points to 2.60 percent after Timothy Geithner accused China of “manipulating” the yuan at a Jan. 22 hearing on his nomination as Treasury secretary, they fell 13 basis points to 2.72 percent 10 days later as Chinese Premier Wen Jiabao said his government’s Treasury strategy would be aimed at maintaining the “value” of “our foreign reserves.” Investors interpreted Wen’s remarks as supportive for U.S. debt.
China Safer Assets
“They got burned when they began diversifying outside of the government securities area, and they still might be stinging from it,” said James Sarni, who helps manage $55 billion as a partner at Payden & Rygel in Los Angeles.
The Chinese are “shifting toward safer assets after taking significant losses,” he said. “Going forward, the Chinese will continue to provide support for the Treasury market.”
China is the biggest foreign holder of Treasuries, owning $681.9 billion, or 12 percent of the U.S.’s outstanding marketable debt, according the Treasury Department. Japan is next, with $577.1 billion, followed by the U.K. at $360 billion.
The U.S. will require more foreign investment than ever this year as the government boosts borrowing with $493 billion of sales this quarter, a 34 percent increase over what it initially forecast.
Goldman Sachs Group Inc., one of the 17 primary dealers that are required to bid at the auctions, said last month the U.S. will likely borrow a record $2.5 trillion this fiscal year ending Sept. 30, almost triple the $892 billion in notes and bonds sold in fiscal 2008.
Wave of Sales
“The market may have trouble absorbing the coming wave of Treasury issuance,” strategists at Citigroup Global Markets Inc. led by Scott Peng in New York wrote to clients on Feb. 5. Ten- year yields are headed ”higher,” according to the report.
Treasuries lost 0.4 percent this month, after a 3.1 percent decline in January that was the most in almost five years, according to Merrill Lynch & Co. indexes.
The difference between two- and 10-year yields widened to 1.99 percentage points, near the most since November, as investors demand more to hold longer maturities.
Credit Markets
Yields suggest Fed Chairman Ben S. Bernanke hasn’t fully thawed credit markets after cutting the benchmark interest rate to a range of zero to 0.25 percent and pumping money into the financial system.
Average 30-year fixed mortgage rates climbed to 5.25 percent in the seven days ended Feb. 5 from 4.96 percent three weeks earlier, according to loan finance company Freddie Mac.
Rates are about 2.25 percentage points higher than 10-year Treasury yields, widening from 1.64 percentage points five years ago.
The difference between what banks and the Treasury pay to borrow for three months, the so-called TED spread, narrowed to 0.97 percentage point from 4.64 percentage points in October. The gap averaged 0.27 percentage point from 2002 through 2006, before the credit crisis began in 2007.
The London interbank offered rate, or Libor, for three-month dollar loans, was 1.24 percent as of Feb. 6, rising from 1.08 percent on Jan. 14.
The Fibonacci series of numbers, a technical indicator some investors use to identify targets, indicates 10-year yields need to hold above 3.07 percent if they are to rise further.
That level is a 50 percent retracement of the decline in yield from 4.1 percent on Oct. 15 to the record low of 2.04 percent on Dec. 18. A move past one level in the series indicates the rate may fall or rise to another level.
