BLBG: Treasuries Two-Year Yield Near Record Low Before Inflation Data
By Lukanyo Mnyanda and Wes Goodman
Sept. 16 (Bloomberg) -- Treasuries two-year yields stayed near a record low before government reports that may show U.S. producer-price increases slowed while consumer inflation stayed near the slowest in more than four decades.
The 10-year note climbed for the third day this week. The central bank is scheduled to buy Treasuries due from March 2012 to February 2013 today as part of its plan to safeguard the economic recovery. Two-year notes were supported by speculation the Federal Reserve may take steps toward further monetary easing at its next policy meeting.
“Inflation is not an issue in the short term,” said Philip Marey, a senior market economist at Rabobank Groep in Utrecht, Netherlands. “We’ve had a lot of speculation about possible quantitative easing. If it were to happen, of course it would push Treasury yields down.”
The yield on the benchmark 10-year note fell 1 basis point to 2.71 percent as of 10 a.m. in London, according to BGCantor Market Data. The 2.625 percent security due August 2020 gained 3/32, or 94 cents per $1,000 face amount, to 99 9/32. The note slid 11/32 yesterday.
Two-year Treasuries yielded 0.48 percent, after dropping to a record low of 0.45 percent on Aug. 24.
MSCI’s Asia Pacific Index of shares declined 0.6 percent, sliding for a second day and helping increase demand for the relative safety of government debt. The Stoxx Europe 600 Index fell 0.4 percent and U.S. stock-index futures also dropped.
Consumer Prices
Consumer prices excluding food and energy rose 1 percent in August from the year before, according to a Bloomberg News survey before the Labor Department report tomorrow. The reading was 0.9 percent in July, the least since 1966. The annual gain in so-called core producer prices slowed to 1.3 percent from 1.5 percent in July, a separate survey showed before today’s report.
The difference between two- and 10-year yields narrowed to 2.22 percentage points from 2.24 percentage points yesterday and its 2010 high of 2.94 percentage points on Feb. 18. A narrowing spread reflects investor demand for longer-maturity debt, which is more sensitive to the inflation outlook.
The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of expectations for consumer prices, has narrowed to 1.78 percentage points from this year’s high of 2.49 percentage points in January. The figure averaged 2.11 percentage points for the past five years.
‘Dramatic Decline’
The Fed purchased $3.89 billion of U.S. securities due from September 2014 to June 2016 yesterday as it tries to keep borrowing costs low. The Fed has bought $21.533 billion of Treasuries since Aug. 17. Policy makers are seeking to keep holdings in the System Open Market Account, or SOMA, at about $2.054 trillion by using the proceeds of principal payments from its agency mortgage-backed securities and agency debt.
Treasuries probably won’t rally further because the economy is poised to rebound, said Lisa Emsbo-Mattingly, global research director at Fidelity Investments, the Boston-based money manager that oversees $1.52 trillion.
“Given the dramatic decline in interest rates and the run up in Treasury bonds, it’s difficult to see what could push rates down much further,” Emsbo-Mattingly wrote in a report on Fidelity’s website. The economy is “going to get better.”
Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., cut holdings of government- related debt for a second month in August.
Ted Spread
The $248 billion Total Return Fund reduced its investment in the debt to 36 percent of assets, the smallest amount since April, from 54 percent the previous month, according to the website of Newport Beach, California-based company.
Yields indicate creditors are becoming more willing to lend, underscoring forecasts for improvement in the economy.
The TED spread, the difference between what banks and the U.S. government pay to borrow for three months, narrowed to 14 basis points, the least since April, from 16 basis points at the end of last week.
An index of U.S. company bonds yielded 2.83 percentage points more than Treasuries, shrinking from this year’s high of 3.25 percentage points set in June.
Treasuries also advanced amid investor speculation that the Bank of Japan will use the proceeds of yesterday’s currency sales to buy the securities.
‘Bullish’
“We continue to be bullish” on Treasuries, said Satoshi Okumoto, a general manager in Tokyo at Fukoku Mutual Life Insurance Co., which has the equivalent of $66.6 billion in assets. “There are no strong signs of inflation now. The Bank of Japan will buy short-term paper.”
Japanese finance Minister Yoshihiko Noda confirmed yesterday that the nation sold yen, though he didn’t say how much or what it plans to do with the proceeds. Japan is already America’s second-biggest creditor after China, holding $803.6 billion of U.S. Treasuries, or almost 10 percent of the publicly traded debt.
Fukoku Mutual has been favoring longer maturities, those that will benefit most from slow inflation, since the Japanese business year started in April, Okumoto said.
Cumberland Advisors Inc. is following a similar strategy, David Kotok, the chief investment officer, said yesterday.
“We do not see any near-term inflation threat,” Kotok, who oversees $1.4 billion at the company in Vineland, New Jersey, wrote in a note to clients. “We continue to invest our bond portfolios with a longer-duration bias.”
To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net
