BLBG: Treasuries Head for Monthly Gain Before U.S. Report on Prices
By Anchalee Worrachate and Wes Goodman
April 30 (Bloomberg) -- Treasuries headed for their best month since January before a government report that economists said will show prices in the U.S. economy climbed at the slowest pace on record.
The 10-year yield stayed within 6 basis points of its lowest in a month as Greece’s debt crisis weakened the euro, increasing demand for dollar-denominated government bonds. Greek officials aim to reach an agreement with the EU and the International Monetary Fund in coming days on budget cuts that may be worth 24 billion euros ($32 billion). Investors pared bets on an increase in U.S. interest rates by the end of 2010.
“We are still stuck with a pretty large output gap around the world and the U.S. inflation outlook should continue to provide support for Treasuries,” said Charles Diebel, a fixed- income strategist at Nomura International Plc in London. “The biggest risk from here would be if the fiscal austerity in Greece and Europe creeps into the rest of the world and further hamper the economic recovery. That would be bond supportive.”
The 10-year note climbed less than 1 basis point to 3.73 percent as of 9:10 a.m. in London, according to BGCantor Market Data. The 3.625 percent security due February 2020 fell 2/32, or 63 cents per $1,000 face amount, to 99 3/32. The yield fell 10 basis points from last month.
Treasuries returned 0.7 percent this month as of yesterday, according to indexes compiled by Bank of America Corp.’s Merrill Lynch unit.
Inflation Guage
The Federal Reserve’s preferred inflation gauge, which is tied to consumer spending and strips out food and fuel costs, climbed at a 0.5 percent annual rate at the start of the year, based on a Bloomberg survey of economists before the Commerce Department report. The gain would be the smallest since record keeping began in 1959.
Gross domestic product grew at a 3.3 percent annual pace from January through March, down from 5.6 percent in the last three months of 2009, according to a separate Bloomberg survey.
Futures on the CME Group Inc. exchange show a 63 percent chance the Fed will raise its target rate for overnight bank lending by at least a quarter-percentage point by December, down from 68 percent a week ago. The central bank has kept the rate between zero and 0.25 percent since December 2008.
Greek Turmoil
Bonds and stocks in Europe’s most indebted nations fell in the past week as Greece’s budget turmoil forced the country to seek a bailout from the European Union and the IMF, and Standard & Poor’s downgraded Greece, Portugal and Spain. The euro fell to a one-year low of $1.3115 on April 28.
Pacific Investment Management Co., which runs the world’s biggest bond fund, won’t buy Greek debt until there is a sustainable solution to its fiscal crisis, Mohamed A. El-Erian said in Bloomberg Radio interview yesterday with Tom Keene.
“The U.S. right now is benefitting from a flight to quality out of Europe,” said El-Erian, the co-chief investment officer at Newport Beach, California-based Pimco. “If the crisis spreads, then all risk assets will come under pressure.”
Just because costs in the economy are contained now doesn’t mean they won’t rise later, according to Bill Gross, Pimco’s other co-chief investment officer. Gross, who runs the $219 billion Pimco Total Return Fund, said last month that excess borrowing will eventually lead to inflation.
The fiscal crisis may spill into banks and the economy, threatening to derail the global recovery, said David Owen, chief European financial economist at Jefferies Group Inc.
‘Wider Implications’
“The current crisis engulfing the euro system is not simply a story about potential sovereign default and further downgrades, but has a far wider implications,” said Owen. “One of our concerns remains the potential impact on banks, significantly increasing the risk for the real economy.”
U.S. note sales this week totaled record $129 billion as President Barack Obama borrows unprecedented amounts to sustain economic growth.
The central bank’s pledge to keep borrowing rates near zero for an “extended period” is raising concern the stance will make it harder for the policy-setting Federal Open Market Committee to keep prices in check as the economy expands.
The Fed reiterated the promise after a meeting April 28, and Kansas City Fed President Thomas Hoenig dissented for a third straight time.
Hoenig believed “it could lead to a build-up of future imbalances and increase risks to longer run macroeconomic and financial stability, while limiting the committee’s flexibility to begin raising rates,” according to the FOMC statement.
‘Dovish’ Yellen
Obama’s announcement yesterday that he plans to nominate San Francisco Fed President Janet Yellen as vice chairman of the Board of Governors in Washington raised speculation she will delay rate increases. Yellen is a so-called dove, one who opposes raising borrowing costs, according to Barclays Capital Inc. in New York, one of the 18 primary dealers that trade directly with the central bank.
“Our economics team views her as the most dovish FOMC member, which would tilt the committee in a more dovish direction and potentially affect the timing and pace of policy tightening,” Barclays’s Ajay Rajadhyaksha, a managing director, and Dean Maki, chief U.S. economist, wrote to clients yesterday.
The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, widened to 244 basis points today, the most since January.
U.S. inflation-protected bond funds attracted a record $857 million during the week ending April 28, according to EPFR Global in Cambridge, Massachusetts, which tracks mutual funds.
Treasuries have returned 1.9 percent this year, while investors seeking safety from Greece drove German bonds up 3.7 percent, according to the Merrill indexes. Japanese government securities gained 0.7 percent, the figures show.
The MSCI World Index of shares beat all three with a 4.6 percent return.
German two-year notes yield 0.80 percent, or 20 basis points less than same-maturity Treasuries. The difference was 23 basis points on April 28, the most since 2007.
