BLBG: Treasuries Rise as Global Slump Concerns Deepen, Stocks Decline
Treasuries rose the most in a week as stocks fell on renewed concern that the global economic recession is deepening, prompting investors to seek safer assets.
U.S. notes climbed in the first day of trading since Feb. 13, after Moody’s Investors Service warned that banks with units in eastern Europe may have their credit ratings lowered. Treasuries also advanced as Japan reported demand for services fell more than estimated in December.
“People are looking to the government bond market as the first place to invest,” said Kazuaki Oh’e, a debt salesman at the Tokyo branch of Canadian Imperial Bank of Commerce, Canada’s fifth-biggest bank. “All over the world, we are seeing bad economic numbers.”
U.S. 10-year note yields fell 13 basis points to 2.77 percent as of 8:55 a.m. in London, according to BGCantor Market Data. The price of the 2.75 percent security due February 2019 rose 1 4/32, or $11.25 per $1,000 face amount, to 99 27/32. A basis point is 0.01 percentage point.
Trading was closed yesterday for Presidents Day.
Ten-year rates will drop to 2.62 percent by March 31, according to a Bloomberg survey of banks and securities companies, with the most recent forecasts given the heaviest weightings. The yield, which fell to a record low of 2.04 percent on Dec. 18, averaged 4.55 percent this decade.
Stocks Decline
Merrill Lynch & Co.’s World Sovereign Bond Index returned 0.5 percent in February as investors shunned higher-yielding assets. The MSCI World Index of shares dropped for a sixth day today, losing 1.1 percent, as every major stock market in Europe declined and U.S. futures slid. The cost of protecting high-risk, high-yield corporate bonds from default rose to near a record in Europe, according to traders of credit-default swaps.
East European banks, which are mainly subsidiaries of financial institutions such as Raiffeisen Zentralbank Oesterreich AG and Swedbank AB, are likely to come under “downward pressure” that may also weaken their parent companies, Moody’s wrote in a report released today in London.
Shrinking economies in Ireland and the Ukraine raised speculation the nations will have trouble paying their debts, said Andrew Brenner, co-head of structured products in New York at MF Global Ltd., the world’s largest broker of exchange-traded futures and options contracts.
“Many worry that some countries are just too leveraged and could go the way of Iceland,” Brenner said, after the nation sought an International Monetary Fund loan to rebuild its economy. “This fear will keep the bid in Treasuries.”
Default Swaps
Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly junk credit ratings increased 24 basis points to 1,117, approaching the all-time high of 1,128 reached Dec. 16, according to JPMorgan Chase & Co. prices at 8:25 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.
The Markit iTraxx Europe index of 125 companies with investment-grade ratings rose 4.5 basis points to 165.5, JPMorgan prices show.
A central bank report in the U.S. today may show manufacturing is shrinking, according to a Bloomberg News survey of economists. Delphi Corp., the bankrupt auto-parts maker, is cutting 775 jobs, or 11 percent of the workforce, at the company’s steering components operation in Saginaw, Michigan, a spokesman said yesterday.
President Barack Obama plans to sign the $787 billion fiscal stimulus bill into law today in Denver, according to his spokeswoman, Jen Psaki.
TIPS
Yields indicate that inflation forecasts among traders are declining.
The difference between rates on 10-year notes and Treasury Inflation Protected Securities, or TIPS, which reflects the outlook among traders for consumer prices, narrowed to 1.23 percentage points from last week’s high of 1.43 percentage points. The figure has averaged 1.70 percentage points for the past year.
The so-called real yield, or what investors get from 10-year notes after inflation, was 2.68 percent, rising from about zero at the end of 2007.
Consumer prices, which rose 0.1 percent for all of 2008, fell 0.1 percent in the 12 months ended in January, according to a separate Bloomberg survey before the Labor Department reports the figure on Feb. 20.
European Central Bank President Jean-Claude Trichet’s decision this month to keep interest rates unchanged will push Europe’s economy deeper into a recession, the region’s bond prices show.
Cut to Zero?
The ECB President said Feb. 5 that following the Federal Reserve and the Bank of Japan in cutting rates to near zero has “drawbacks” that are “inappropriate.” Even so, investors drove yields on two-year German bunds to the lowest level relative to longer-maturity debt since 1997, a sign they are betting he will have to do just that.
“The bond market is telling the ECB they need to wake up to reality,” said Komal Sri-Kumar, chief global strategist at Los Angeles-based TCW Asset Management, which has about $118 billion in assets. “They didn’t do their job on time or adequately, and need to cut rates again as soon and as much as they can. They also need to start thinking of unconventional measures.”
Investors from outside the U.S. bought $20 billion more of the nation’s long-term bonds, notes and stocks than they sold in December, following two months of net sales, based on a Bloomberg survey of economists before the Treasury Department report today. The monthly average since the start of 2008 is $44 billion of net purchases.
Credit Market
Fed Chairman Ben S. Bernanke is scheduled to speak tomorrow on central bank programs to spur the economy.
Yields suggest government and Fed efforts have yet to restore credit markets to where they were before trading froze last year.
The difference between what banks and the Treasury pay to borrow for three months, the so-called TED spread, narrowed to 0.96 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, increased to 1.246 percent yesterday from 1.08 percent on Jan. 14. It may slip to 1.23 percent today, according to ING Groep NV.
Average 30-year fixed mortgage rates rose to 5.16 percent in the seven days ended Feb. 12 from 4.96 percent four weeks earlier, according to loan finance company Freddie Mac. Rates are about 2.27 percentage points higher than 10-year Treasury yields, widening from 1.48 percentage points five years ago.
