BLBG: Treasuries Gain Most Since May as Turmoil in Libya Raises Risk Aversion
Treasury 10-year notes gained the most in nine months as political turmoil in Libya drove investors to the safety of U.S. debt and raised concern that surging oil prices may restrain a fledgling economic recovery.
Yields on the benchmark securities fell for a third week, the longest stretch since October, as Libyan leader Muammar Qaddafi rallied supporters in the capital, Tripoli, yesterday as opposition forces consolidated control in the eastern part of the North African country. Next week the Federal Reserve plans to buy between $18.5 billion and $26.5 billion in U.S. debt.
“People have translated higher energy costs into concerns about the possibility of an oil shock that will act as a tax on the economy,” said Russ Certo, a managing director and co-head of rates trading at Gleacher & Company in New York. Investors want to hold the safest securities “because of the possibility of getting burned by event risk.”
The yield on the 10-year Treasury fell 17 basis points to 3.41 percent, according to BGCantor Market Data. The 3.625 percent note maturing in February 2021 was at 101 24/32.
The weekly yield decline was the largest since May 21, when investors were lured to safe assets amid concern that euro-zone debt problems spreading.
Yield Difference
Treasuries have handed investors a loss of 0.3 percent this month and this year, compared with a gain of 5.9 percent last year, according to Bank of America Merrill Lynch data.
U.S. securities also rose yesterday as investors purchased longer-term debt to increase the duration of their portfolios to match benchmarks at the end of the month, such as the Barclays U.S. Treasury Index.
U.S. government debt extension is expected to increase by 0.13 years for February, compared with 0.08 years for January, according to Barclays Plc, one of 20 primary dealers that trade directly with the Fed.
Crude oil futures for April delivery in New York rose 14 percent this week to $97.88 a barrel yesterday, and touched $103.41 on Feb. 24, the highest level since September 2008.
The U.S., Saudi Arabia and the International Energy Agency said they can compensate for any disruption to crude supplies caused by turmoil in Libya, Africa’s third-largest oil producer.
Oil Drag
Longer-term Treasuries have rallied as “each $5 oil rise decreases gross domestic product by 0.2 percent to 0.3 percent if these higher prices are sustained,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, which manages $12 billion in fixed-income assets.
“Over the weekend liquidity goes away, but event risk doesn’t, so you don’t want to be caught offside, LeBas said.
The U.S. economy grew at a 2.8 percent annual rate in the fourth quarter, slower than previously calculated and less than forecast as state and local governments made deeper cuts in spending. The revised increase in gross domestic product compares with a 3.2 percent estimate issued last month and a 2.6 percent gain in the third quarter, figures from the Commerce Department showed yesterday in Washington.
U.S. payrolls probably grew in February at the fastest pace in nine months as factories expanded and consumers spent more, economists said before reports next week.
Jobs Growth
Employment increased by 190,000 workers this month, the most since May, after a 36,000 gain in January, according to the median forecast of 59 economists surveyed by Bloomberg News before a Labor Department data on March 4. The report may also show the jobless rate increased to 9.1 percent from 9 percent.
“The geopolitical situation is pushing yields down, despite the growth picture holding up,” said Jeffrey Cleveland, senior economist at Payden & Rygel in Los Angeles, which manages $56 billion.
The difference between rates on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, widened to 2.44 percentage points on Feb 24, the most since April.
The Fed bought $7.2 billion of Treasuries yesterday, bringing total purchases since November to $373.5 billion under the central bank’s plan to acquire $600 billion through June to bolster the economy.
The Treasury sold $35 billion in two-year notes on Feb. 23 at a yield of 0.745 percent, $35 billion of five-year notes yesterday at a yield of 2.19 percent and $29 billion of seven- year notes at a yield of 2.854 percent.
The bid-to-cover ratio for the five-year sale was 2.69, compared with an average of 2.79 at the previous 10 sales. Indirect bidders, an investor class that includes foreign central banks, purchased 34.2 percent of the notes, the lowest since November, when they took home 31.5 percent.
“We had a sloppy auction, with the street ending up with more paper than they would like,” said Larry Milstein, managing director of government and agency debt trading in New York at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors. “There wasn’t much setup because of the flight-to-quality bid we’ve seen.”
To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Susanne Walker in New York at swalker33@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
