BLBG: Treasuries Keep Gains Before Bernanke Speech, 10-Year Debt Sale
By Theresa Barraclough and Wes Goodman
April 7 (Bloomberg) -- Treasury 10-year notes held their biggest gain in three weeks on speculation Federal Reserve Chairman Ben S. Bernanke will say the economy needs low interest rates when he speaks today in Dallas.
The difference between two- and 10-year yields was near the narrowest this month after minutes of the central bank’s March meeting released yesterday showed some officials were surprised at the pace at which inflation was slowing. The Treasury will sell $21 billion of 10-year debt today, the third of four auctions of notes and bonds this week.
“The unemployment situation is still very fragile and so the Fed has to keep interest rates low for a long time,” said Akira Takei, a manager in the international bond-investment department in Tokyo at Mizuho Asset Management Co., a unit of Japan’s second-largest bank. “The auctions will be OK and better than the last ones.”
The benchmark 10-year note yielded 3.95 percent as of 6:32 a.m. in London, according to BGCantor Market Data. The 3.625 percent security traded at 97 11/32. The yield dropped four basis points yesterday, the biggest decline since March 16.
Ten-year yields may fall as low as 3 percent by the end of June, Mizuho’s Takei said. Should his predictions prove accurate, investors who buy today would make an 8.8 percent return, Bloomberg calculations show.
The difference between two- and 10-year yields was 2.82 percentage points, after shrinking to 2.79 points yesterday, the least since March 31, according to Bloomberg data.
‘Extended Period’
The FOMC said in its March statement the recovery “is likely to be moderate for a time.” Low rates of resource use and subdued inflation “are likely to warrant exceptionally low levels of the federal funds rate for an extended period,” policy makers said. Central bankers have used the “extended period” phrase at every meeting since March 2009. Some members also said “the risks of an early start to policy tightening exceeded those associated with a later start.”
Bernanke is scheduled to speak about economic challenges at 1:30 p.m. in Dallas.
“Policy makers still prefer the ‘extended period’ language as there are still headwinds and inflation is still not a problem, which continues to give them policy flexibility,” Christopher Sullivan, who oversees $1.6 billion as chief investment officer at United Nations Federal Credit Union in New York, said yesterday.
TIPs Spread
The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of expectations for consumer prices, was 2.33 percentage points today, down from this year’s high of 2.49 percentage points on Jan. 11.
Ten-year yields rose as high as 4.0095 percent on April 5 as the government prepared for this week’s $82 billion of auctions. The 10-year notes to be sold today yielded 3.97 percent in pre-auction trading, up from 3.735 percent at the previous sale on March 10.
Investors bid for 3.45 times the amount of debt on offer last month, versus the average of 2.87 at the prior 10 sales. Indirect bidders, the group that includes foreign central banks, bought 35.1 percent of the debt on offer, versus the 10-sale average of 40.6 percent.
The 10-year auction follows a record-tying $40 billion offering of three-year notes yesterday. The securities drew a yield of 1.776 percent, compared with a forecast of 1.766 percent in a Bloomberg survey of eight of the Fed’s primary dealers, companies obliged to bid at government debt sales.
The Treasury is scheduled to sell $13 billion of 30-year bonds tomorrow. It auctioned $8 billion in TIPs on April 5.
‘Time to Sell’
Supply will start to overtake demand in the second half of 2010 and push yields up, according to Mitsubishi UFJ Trust & Banking Corp., a unit of Japan’s largest bank.
“This would be the time to sell,” said Yusuke Tanaka, a senior dealer at Mitsubishi UFJ in Singapore. “The U.S. is issuing more and more Treasury bonds.”
Demand was weaker than dealers forecast at the Treasury’s last series of auctions, sparking concern record spending is damping investor interest.
President Barack Obama and Congress have increased U.S. marketable debt to a record $7.41 trillion to fund spending programs. At the same time, data indicate the economic recovery may be gaining traction, spurring investors toward assets tied to growth.
Treasury 10-year notes may draw buyers as yields climb toward 4.01 percent, Daiwa Asset Management Co. said, citing trading patterns.
A Fibonacci graph shows the level is a 61.8 percent retracement of a slide in yields that started July 6, 2007, and ended Dec. 19, 2008, based on weekly closing levels. Using the Fibonacci sequence of numbers, a failure to advance past one of the levels indicates the increase in rates is ending.
“It’s a strong resistance level and a psychological level,” said Tsutomu Komiya, who handles U.S. government debt in Tokyo at Daiwa, which has $77 billion in assets. “If the 10- year yield breaks that resistance, we may see a selloff.” The company is part of Japan’s second-biggest investment bank.
To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net.
