BLBG: Treasuries Advance for Fifth Day as Stock Losses Boost Demand for Safety
Treasuries rose for a fifth day, the longest winning streak in nine months, as Asian stocks fell and economists said U.S. reports today and tomorrow will show the nation is struggling to add jobs.
The U.S. inflation rate is headed toward zero, Goldman Sachs Group Inc. said in a report. The difference between rates on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, narrowed to 1.85 percentage points from this year’s high of 2.49 percentage points in January. The spread was about two basis points above an eight-month low.
“The U.S. may fall into deflation in the next two years,” said Hideo Shimomura, who helps oversee the equivalent of $56.5 billion in Tokyo as chief fund investor at Mitsubishi UFJ Asset Management Co., a unit of Japan’s biggest bank. “Global economic momentum has reached a peak.” Shimomura said he bought Treasuries in June. Deflation is a general drop in prices.
The 10-year yield fell one basis point to 2.93 percent as of 7:01 a.m. in London, according to BGCantor Market Data. The 3.5 percent security maturing May 2020 rose 3/32, or 94 cents per $1,000 face amount, to 104 7/8.
MSCI’s Asia Pacific Index of shares dropped 1.3 percent, falling for a third day and feeding demand for the relative safety of government debt.
Mortgage Rates
Ten-year rates, a benchmark for consumer and company borrowing costs, were at levels not seen since April 2009. U.S. 30-year fixed mortgage rates declined to a record 4.69 percent in June, according to mortgage-finance company Freddie Mac in McLean, Virginia.
The difference between two- and 10-year yields narrowed to 2.31 percentage points, the least since October. Two-year rates tend to track the Federal Reserve’s target for overnight lending because of their shorter maturity. Yields on longer-term bonds are more influenced by inflation.
Treasuries also gained after Moody’s Investors Service said yesterday it may cut Spain’s Aaa debt, adding to concern European efforts to rein in government spending will slow the global recovery.
Moody’s analysts including Senior Vice President Kristin Lindow in New York said in a statement that Spain’s Aaa classification may be lowered two grades. The review will be concluded within three months, the company said.
U.S. central bankers can keep their target rate at the current range of zero to 0.25 percent without worrying it will lead to inflation, Goldman economists including Jan Hatzius in New York wrote in their report yesterday.
‘Bubble Risk’
“The ‘bubble risk’ associated with an easy monetary policy is currently low,” according to Goldman, one of the 18 primary dealers that trade directly with the central bank.
The Fed’s preferred price measure, which excludes food and fuel, rose 1.3 percent in May from a year earlier. The figure was 1.2 percent in April, matching the least since 2001. Fed policy makers last week repeated a pledge to keep interest rates near zero “for an extended period.”
Initial jobless claims, a gauge of firings, have been in a range of 440,000 to 490,000 per week this year. Claims fell to 455,000 last week from 457,000 in the prior seven days, according to a Bloomberg News survey before the Labor Department report today.
The U.S. lost 125,000 jobs last month, a separate Labor Department report tomorrow will show, according to a separate Bloomberg survey.
Previous Payrolls
Ten-year yields tumbled 16 basis points after the last employment report on June 4, which showed the U.S. added fewer positions that economists predicted. The drop in yields was the biggest since March 18, 2009, when the Federal Reserve surprised investors with plans to purchase as much as $300 billion in government debt.
Two-year notes yielded 0.61 percent, versus the record low of 0.5856 percent set yesterday. The yield is 36 basis points more than the upper end of the Fed’s target range for its benchmark rate, near the narrowest spread since 2008.
Bill Gross, manager of the world’s biggest bond fund, and ex-Morgan Stanley President Zoe Cruz are among investors that see demand for low-rated corporate debt as Treasuries rally.
Gross’s Pacific Investment Management Co. and Cruz’s Voras Capital Management LP were among at least eight firms telling regulators in June they are starting funds that may buy junk bonds and distressed securities.
High-yield debt was little changed last quarter, trailing the 4.7 percent return for Treasuries, Bank of America Merrill Lynch indexes show.
“In the high-yield sector, you don’t really need an economic recovery,” said David Breazzano, who co-founded DDJ Capital Management LLC after co-managing distressed and high- yield assets for Boston-based Fidelity Investments. “You just need the economy to stay where it is, and you can get double- digit returns and you have less interest-rate sensitivity” than with Treasuries.
