BLBG: Treasuries Rise as Fed May Indicate It Is Open to Buying Debt
By Wes Goodman
Sept. 21 (Bloomberg) -- Treasuries rose for a third day, the longest winning streak since July, on speculation the Federal Reserve will use a meeting today to indicate it is open to increasing purchases of U.S. debt if economic growth slows.
Two-year yields were one basis point away from a record low after Richard Clarida of Pacific Investment Management Co., which runs the world’s biggest bond fund, said the Fed statement will prepare investors for additional purchases of securities this year. BNP Paribas and Deutsche Bank AG, primary dealers that trade directly with the central bank, say Treasuries are poised to rally.
“Our call is for investors to buy,” said Tomohisa Fujiki, an interest-rate strategist in Tokyo at BNP Paribas Securities Japan Ltd., a unit of France’s largest bank . “The economic picture will be more sluggish. Unemployment will go higher.”
The yield on the benchmark 10-year note declined two basis points to 2.69 percent as of 6:53 a.m. in London, according to BGCantor Market Data. The 2.625 percent security due August 2020 rose 1/8, or $1.25 per $1,000 face amount, to 99 14/32.
The Fed will affirm its pledge to keep interest rates low, according to economists surveyed by Bloomberg News. The central bank will also stick with plans to use proceeds from principal payments on its agency mortgage-backed securities and agency debt to buy Treasuries, the survey showed. The Fed has purchased $28.1 billion of Treasuries since it started the program Aug. 17.
Policy makers will refrain from expanding the Fed’s balance sheet by purchasing additional securities, according to 60 of 64 analysts surveyed from Sept. 16 to Sept. 17.
‘Real Possibility’
“The Fed’s rhetoric will get the markets ready for the real possibility of expanding their balance sheet at a later meeting this year,” Clarida, a Columbia University professor and global strategic adviser for Pimco, said in a radio interview yesterday on “Bloomberg Surveillance” with Tom Keene.
BNP and Deutsche Bank both predict 10-year yields will fall to 2 percent by Dec. 31. An investor who bought today would earn 6.7 percent if the forecasts prove correct, according to data compiled by Bloomberg.
“Yields are still headed lower,” Deutsche Bank economists and analysts including Joseph LaVorgna in New York wrote in a report Sept. 17.
Daiwa Bearish
Daiwa SB Investments Ltd., part of Japan’s second-biggest brokerage by market value, is bearish on Treasuries.
“Yields will go up,” said Kei Katayama, who helps oversee the equivalent of $53.2 billion as leader of the foreign fixed- income group in Tokyo at Daiwa SB. “The economy is slow, but it’s still growing.”
The duration of Daiwa SB’s Treasury holdings is less than the benchmark it uses to gauge performance, Katayama said. Duration is a measure of a portfolio’s sensitivity to yield changes. A shorter figure indicates a more bearish position.
Housing starts probably increased in August for a second month, according to a Bloomberg survey before the Commerce Department reports the figure today.
Lennar Corp., the third-largest U.S. homebuilder by revenue reported yesterday better third-quarter profit than analysts estimated. Shares rose 8.2 percent, the most since May.
The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, has climbed to 1.79 percentage points from this year’s low of 1.47 percentage points in August. It is still less than the five-year average of 2.11 percentage points.
Two-year Treasuries yielded 0.46 percent, versus the all- time low of 0.45 percent on Aug. 24.
Spreads Narrow
The two-year yield was 33 basis points more than same- maturity debt in Japan, within one basis point of the narrowest spread since the end of 2008. Investors can earn 0.81 percent by buying German two-year notes, which is 35 basis points more than Treasuries, the most this year.
German government bonds have returned 8 percent in 2010, topping the 7.8 percent gain for Treasuries, Bank of America Merrill Lynch indexes show. Japan sovereign debt handed investors a 2.5 percent gain.
German bunds rallied in 2010 as investors sought the relative safety of the nation’s debt as fixed-income securities tumbled in Greece, Ireland and Portugal, which are among Europe’s most-indebted countries.
Ireland will try to sell as much as 1.5 billion euros ($1.96 billion) of four- and eight-year bonds today as the government tries to convince investors the country can avoid a European Union bailout. Portugal is scheduled to auction up to 1 billion euros of securities due in 2014 and 2020 tomorrow.
Treasuries rose yesterday as the central bank purchased $5.19 billion of U.S. debt to prevent money being drained out of the financial system.
Ten-year notes climbed on Aug. 10, when the Fed said after its policy meeting that it would keep its bond holdings level by resuming the purchase of U.S. debt to support a recovery it described as “more modest” than earlier anticipated.
To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.
