BS: Treasury 10-Year Yield Near Two-Week Low Before Services Data
Aug. 4 (Bloomberg) -- Treasuries rose, leaving the 10-year yield near the lowest in two weeks, before a report analysts said will show U.S. service industries, the largest part of the economy, grew at the slowest pace in five months in July.
Two-year yields approached a record low as declines in stocks fueled demand for the safest assets and speculation mounted that the Federal Reserve may resume bond purchases to safeguard the recovery. Futures contracts indicated traders are betting the Federal Reserve will keep borrowing costs near zero for at least a year. The U.S. is scheduled to announce the sizes of next week’s three-, 10- and 30-year auctions today.
“The market is expecting a softening in the economy” and Treasuries also rallied amid “speculation regarding a possible new quantitative-easing program from the Fed,” said Karsten Linowsky, a fixed-income strategist at Credit Suisse Group AG in Zurich. “People are positive on Treasuries.”
The benchmark 10-year yield fell one basis point to 2.89 percent as of 7:09 a.m. in New York, according to BGCantor Market Data. The 3.5 percent note due in May 2020 gained 4/32, or $1.25 per $1,000 face amount, to 105 4/32. The yield slipped to 2.8779 percent today, the least since July 22, according to Bloomberg generic prices. The two-year note yielded 0.54 percent. It fell to 0.5143 yesterday, the lowest on record.
MSCI’s Asia Pacific Index of shares slid 0.5 percent, falling for the first time this week. The Stoxx Europe 600 Index lost 0.7 percent. U.S. stock-index futures also fell.
Services Index, Japan
Japan’s 10-year yields fell below 1 percent for the first time since August 2003 amid speculation that a slowing global economy and the yen’s advance to an eight-month high against the dollar will increase the risk of deflation. The extra yield, or premium, investors demand to hold 10-year Treasuries instead of similar Japanese securities increased by three basis points to 188 basis points, according to Bloomberg generic prices.
Thirty-day federal funds futures contracts for delivery in November 2011 yielded 0.53 percent, indicating investors expect the central bank to increase borrowing costs that month from current levels. The central bank has kept the so-called fed funds rate, its target for overnight lending between banks, in a range of zero to 0.25 percent since December 2008.
Fed Speculation
Treasuries rose yesterday on speculation Fed Chairman Ben S. Bernanke will take steps including purchases of government securities to stimulate growth as soon as the next central bank meeting on Aug. 10.
“Further evidence of a slowdown in the U.S. economy coupled with speculation of the Fed extending quantitative easing benefited Treasuries,” analysts including Luca Cazzulani, Milan-based senior fixed-income strategist at UniCredit SpA in Milan, wrote in a client note today. “Soft data should keep bonds well bid.”
U.S. policy makers used purchases of Treasury, housing- agency and mortgage-backed securities to spur growth after cutting the target lending rate to near zero.
“Low interest rates will continue for a long, long time,” said Tsutomu Komiya, who handles U.S. government debt in Tokyo at Daiwa Asset Management Co., which has $113.2 billion in assets. “Yields on short-term notes will decline.”
Two-year rates tend to track the Fed’s target for overnight lending because of their shorter maturity. Longer-term yields are more influenced by inflation and the size of the government’s debt.
‘Extreme Over-Valuation’
Daiwa Asset, part of Japan’s second-biggest brokerage, is favoring mid-term Treasuries including five-year notes because they offer higher yields than 2012 debt, Komiya said.
Demand for five-year securities shrank the extra yield they offer over two-year notes to less than 1 percentage point today for the first time since April 2009.
Five-year securities are the “belle of the ball,” as Treasuries rally, UBS Securities LLC said in a report yesterday by analysts including Chris Ahrens in Stamford, Connecticut. The gains pushed the note “towards a position of extreme over- valuation,” according to UBS, one of the 18 primary dealers required to bid at the government’s debt sales.
Thirty-year bonds are lagging behind the rest of the market, widening the yield difference over 10-year rates to 1.14 percentage points, the most since Bloomberg data began tracking the figures three decades ago.
The U.S. will probably sell $34 billion of three-year notes Aug. 10, $24 billion of 10-year securities Aug. 11 and $16 billion in 30-year bonds Aug. 12, according to Wrightson ICAP LLC. The company, based in Jersey City, New Jersey, specializes in U.S. government finance and is a unit of ICAP Plc.
The $74 billion total compares with $69 billion the last time this combination of securities was sold in July.
--Editors: Keith Campbell, Peter Branton.
To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net.
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
