BLBG: Treasuries Head for Weekly Decline as Retail Sales May Gain
By Wes Goodman
May 14 (Bloomberg) -- U.S. 10-year notes headed for their biggest weekly decline since March before a government report that economists said will show U.S. retail sales rose for a seventh month.
Treasuries alternated between gains and losses this week as European governments tried to restore confidence in the euro with a loan package worth almost $1 trillion and a program of bond purchases. U.S. two-year notes drew investors seeking the relative safety of government debt.
“Yields will go up in the next two to three months,” said Yusuke Tanaka, a senior dealer in Singapore at Mitsubishi UFJ Trust & Banking Corp., a unit of Japan’s largest publicly traded bank. “The economy is recovering. The flight to quality will gradually weaken.”
Benchmark 10-year notes yielded 3.54 percent at 6:36 a.m. in London, according to data compiled by Bloomberg. The 3.5 percent security due May 2020 traded at 99 5/8.
Ten-year rates increased 12 basis points this week, the most since the period ended March 26. They will advance to 4.5 percent by year-end, Tanaka said. A basis point is 0.01 percentage point.
Yields on two-year notes rose two basis points from May 7 to 0.83 percent. The securities are seen as among the safest investments because of their top debt ratings and short tenor.
The difference between rates on two- and 10-year notes widened to 2.71 percentage points from 2.62 percentage points last week. It was 2.24 percentage points a year ago.
Traders added to inflation bets this week, yields show.
Signs of Recovery
The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, widened to 2.28 percentage points from 2.15 percentage points May 7. The 10-year average is 2.07 percentage points.
U.S. retail sales increased 0.2 percent in April, according to the median estimate of 83 economists surveyed by Bloomberg News before the Commerce Department issues the figure. Other reports today may show production picked up, consumer confidence increased and businesses boosted inventories.
Treasuries have fluctuated as investors gauged European efforts to contain the spreading debt crisis there.
An index of U.S. government securities due in 10 years and longer fell 1.5 percent in the past five days, after European officials announced their rescue plan on May 10, according to data compiled by Bloomberg.
Over the past month, bond returns plus gains in the currency fueled by investor demand for dollar assets pushed the gauge up 4.4 percent, the most of 174 debt indexes around the world, the data show.
Europe’s Problems
Declines in the euro and rising money-market rates indicate investors are concerned Europe hasn’t solved its problems.
“The euro fell pretty much all day yesterday,” Carl Weinberg, chief economist at High Frequency Economics in Valhalla, New York, wrote in a note to clients. “Currency speculators are not happy with the outlook for the zone.”
The euro dropped as low as $1.2516 today, a level not seen since March 5, 2009. The 16-nation currency has depreciated 1.7 percent against the dollar this week following the European Union’s plan to stop Greece’s debt crisis from spreading.
Three-month dollar Libor rose to 43.6 basis points yesterday, the most since August. The figure was as high as 4.82 percentage points in 2008 during the global credit crisis.
The extra yield that Libor offers over the overnight indexed swap rate, the Libor-OIS spread, widened to 21 basis points today, also the most since August.
Rising Bank Rates
Libor has risen 16 of the past 17 days as the debt crisis stoked concern that banks’ holdings of bonds from countries struggling to cut their budget deficits, such as Greece, Portugal and Spain, will deteriorate in quality.
“Treasury yields will continue to decline,” said Hiromasa Nakamura, who helps manage the equivalent of $20.8 billion as a senior investor in Tokyo at Mizuho Asset Management Co., a unit of Japan’s second-largest publicly traded bank. “The financial stabilization package was released but the Greece deficit problem was not resolved.”
Mizuho Asset sold European bonds and bought Treasuries at the end of April, Nakamura said.
Nomura’s Strategy
Long-term Treasuries are poised to gain now that this week’s government auctions are over, analysts at Nomura Securities International Inc. led by George Goncalves in New York wrote to clients yesterday.
Treasuries due in 10 years and longer will outperform shorter maturities as investors seek safety along with the highest yields available on U.S. government debt, the report said. Nomura is one of 18 primary dealers that trade with the Federal Reserve.
The U.S.’s debt sales of three-, 10- and 30-year securities this week totaled $78 billion.
Treasury bulls are in the minority. The 10-year yield will advance to 4.07 percent by year-end, according to a Bloomberg survey of banks and securities companies, with the most recent forecasts given the heaviest weightings.
Investors should “take profits” in Treasuries, UBS AG, another primary dealer, said in a report yesterday by analysts including Larry Hatheway, the London-based chief economist.
To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net;
