BLBG: Treasuries Gain on Speculation Rescue Plan Will Be Inadequate
Treasuries rose on speculation Treasury Secretary Timothy Geithner’s plan to rescue the banking system will prove inadequate, boosting demand for the safety of government debt.
U.S. securities advanced amid expectations Federal Reserve Chairman Ben S. Bernanke may tell Congress today the central bank is prepared to buy longer-term U.S. debt to cut consumer borrowing costs. Geithner said the Obama administration will fight a “two-front” battle to jumpstart the economy by stimulating employment and bolstering financial markets. The U.S. will sell a record $32 billion of three-year notes today.
“It doesn’t seem to be a forceful enough plan, given market expectations,” said Brian Edmonds, head of interest rates at Cantor Fitzgerald LP in New York, one of 17 primary dealers that are required to bid in Treasury sales.
The yield on the 10-year note tumbled 11 basis points, or 0.11 percentage point, to 2.88 percent at 11:20 a.m. in New York, according to BGCantor Market Data. The price of the 3.75 percent security maturing in November 2018 climbed 29/32, or $9.06 per $1,000 face amount, to 107 10/32.
The benchmark note’s yield exceeded 3 percent yesterday for the first time since Nov. 28 after falling to a record low of 2.04 percent on Dec. 18.
Inventories at U.S. wholesalers fell 1.4 percent in December, twice as much as forecast, as businesses tried to keep up with plummeting sales, a Commerce Department report showed.
Toxic Assets
Geithner said the government will provide funds for a new effort to address the toxic assets choking banks’ balance sheets, with the initiative possibly growing to a size of $1 trillion.
“We are exploring a range of different structures for this program, and will seek input from market participants and the public as we design it,” he said in prepared remarks. “We believe this program should ultimately provide up to $1 trillion in financing capacity, but we plan to start it on a scale of $500 billion, and expand it based on what works.”
Fed officials have yet to resolve an internal debate over whether to purchase long-term U.S. debt, according to people familiar with the deliberations. Bernanke first talked about the option of buying Treasuries on Dec. 1.
‘Fed Will Buy’
“The rally is driven off the thinking that Treasuries will get Fed support,” said Andrew Richman, who oversees $10 billion in fixed-income assets as a strategist in West Palm Beach, Florida, at SunTrust Bank’s personal-asset management division. “People are thinking the Fed will buy Treasuries to cut rates.”
The U.S. will sell $32 billion of three-year notes today, followed by $21 billion of 10-year notes tomorrow and $14 billion of 30-year bonds Feb. 12, in the Treasury’s biggest weekly sale.
Investors bid for 2.21 times the amount of debt on offer at the prior three-year note sale on Jan. 7. The average for the past 10 auctions is 2.4. Three-year note yields fell two basis points to 1.43 percent today, compared with the high yield of 1.2 percent at last month’s sale.
Foreign investors were “opportunistically making purchases” of Treasuries at the expense of other asset classes, according to Dan Mulholland, a Treasury trader and strategist in New York at RBC Capital Markets, the investment-banking arm of Canada’s biggest bank.
Central banks and other overseas investors own more than 53 percent of outstanding U.S. public debt, up from 34 percent in 2000, Treasury data show.
New York Lottery
Treasuries lost 3.6 percent this year, their worst start to a year since 1980, according to Merrill Lynch & Co.’s Treasury Master Index data. Yields climbed on longer-maturity debt in five of the past six weeks as bond prices fell amid concern that the Fed won’t buy U.S. debt to keep yields low while the government increases borrowing.
Investors sold Treasuries this year as credit markets began to thaw, reducing the need for the haven of government debt. Three-month Treasury bill rates climbed to 0.32 percent today after plunging to minus 0.04 percent on Dec. 4.
The New York Lottery is proposing moving its $1.3 billion prize fund out of the safety of Treasuries and into investments such as stocks, corporate bonds, real estate and hedge funds. New York would be the first state lottery among the 20 largest to shift to pension fund-style investments from U.S. debt, according to annual reports.
Mortgage Rates
Average 30-year fixed mortgage rates rose 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 226 basis points higher than 10-year Treasury yields, widening from 162 basis points five years ago.
Investors are adding to inflation bets as President Barack Obama works to push his economic stimulus plan through Congress.
The difference between rates on 10-year notes and Treasury Inflation Protected Securities, or TIPS, which reflects the outlook among traders for consumer prices, was 131 basis points, near the widest since October.
New York Fed President William Dudley spoke about TIPS at a closed conference today. Dudley, recently named head of the New York Fed to replace Geithner, has said in the past he supports the TIPS program.
