BLBG: Two-Year Treasury Yields Near Record Low as Manufacturing May Be Slowing
Treasury two-year yields were about three basis points away from a record low as economists said an industry report this week will show manufacturing growth slowed in September.
Two-year notes yielded 19 basis points more than the upper range of the Federal Reserve’s target for overnight loans between banks on speculation the central bank will increase Treasury purchases this year to keep borrowing costs down. The spread narrowed to 16.95 basis points on Sept. 21, the least since Dec. 15, 2008, the day before the Fed last reduced the rate. The Treasury is scheduled to sell $36 billion of two-year securities today, the first of three note sales this week.
“Yields will fall into year-end,” said Tomohisa Fujiki, an interest-rate strategist in Tokyo at BNP Paribas Securities Japan Ltd., whose U.S. unit is one of the 18 primary dealers that are required to bid at the government’s debt sales. “The Fed is going to increase its Treasury purchases.”
Two-year notes yielded 0.44 percent as of 7:37 a.m. in London, according to BGCantor Market Data, compared with the record low of 0.4074 set Sept. 22. The 0.375 percent security due in August 2012 traded at 99 7/8.
The benchmark 10-year note yield was little changed at 2.60 percent. It will drop to 2 percent by year-end, Fujiki said.
The Institute for Supply Management’s factory index fell to 54.5 this month from 56.3 in August, according to a Bloomberg survey of economists before the Oct. 1 report. Household purchases rose 0.4 percent in August, the same as in July, Commerce Department figures the same day may show.
Buying Treasuries
The Fed said in August it would use principal payments from its holdings of agency mortgage-backed securities and agency debt to buy Treasuries. It announced on Sept. 21 it is prepared to do more to help the economy and to keep costs from falling, adding to speculation policy makers are contemplating adding securities to the Fed’s holdings, a strategy known as quantitative easing.
The difference between yields on 10-year notes and Treasury Inflation Protected Securities, or TIPS, a gauge of trader expectations for consumer prices, was 1.83 percentage points. The five-year average is 2.10 percentage points.
Treasuries have returned 2.2 percent so far this quarter, and are up 8.2 percent in 2010, according to Bank of America Merrill Lynch indexes. Global sovereign bonds handed investors gains of 1.8 percent since June and 5.7 percent this year, the indexes show.
Fed Model
This year’s rally in Treasuries has pushed yields so low that a Fed measure of risk shows U.S. government securities are too expensive.
The financial model, which includes expectations for interest rates, growth and inflation, shows Treasuries are the most overvalued since the financial crisis in December 2008, just before 10-year note yields almost doubled in the following six months. Investors who held 10-year securities through that period lost 13 percent, according to Bank of America Merrill Lynch index data.
While Treasuries have risen this year, they are down 0.5 percent this month even after Fed Chairman Ben S. Bernanke and fellow policy makers signaled last week they may be willing to embark on another round of quantitative easing. Investors are concerned yields can’t fall further without another recession.
‘Hard to Justify’
“It’s very hard to justify where yields are now, unless we are indeed on the verge of something really awful,” said Johan Jooste, a strategist at Bank of America Corp.’s Merrill Lynch Global Wealth Management unit in London where he helps invest about $1.4 trillion. “We are aware that there is a short-term factor, such as possibility that the Fed might buy bonds. But longer term, you have to ask yourself what you get paid if you hold government bonds.”
Investors in a survey by Ried Thunberg ICAP Inc., a unit of the world’s largest inter-dealer broker, became more bearish on the outlook for Treasuries through the end of June 2011.
Ried’s sentiment index dropped to 42 for the seven days ended Sept. 24 from 44 in the week before. A figure less than 50 indicates that investors expect prices to fall.
The two-year notes being sold today yielded 0.46 percent in pre-auction trading, versus the prior record low of 0.498 percent at the previous auction on Aug. 24. Investors bid for 3.12 times the amount on offer last month, versus an average of 3.14 for the past 10 sales.
Indirect bidders, the category of investors that includes foreign central banks, bought 29.2 percent of the notes, compared with the 10-sale average of 38.1 percent.
The Treasury is also scheduled to auction $35 billion of five-year debt tomorrow and $29 billion in seven-year securities the following day.
To contact the reporters on this story: Keith Jenkins in London at Kjenkins3@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net.
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
