BS: Treasuries Snap Loss as Libya Raids Threaten to Boost Oil Costs
By Wes Goodman
March 22 (Bloomberg) -- Treasuries snapped a three-day decline on speculation violence in Libya will push oil and gasoline prices higher, slowing the U.S. economic expansion.
Demand for the relative safety of government debt increased after Tokyo Electric Power Co. said its Fukushima Dai-Ichi power plant released radioactive material into the sea. Japanese investors will probably keep their Treasury holdings following the nation’s biggest earthquake, Fukoku Mutual Life Insurance Co. said, damping speculation they are about to sell to fund reconstruction.
“It will be difficult for yields to rise,” said Hideo Shimomura, who helps oversee the equivalent of $61.7 billion as chief fund investor in Tokyo at Mitsubishi UFJ Asset Management Co., a unit of Japan’s biggest bank. “The U.S. economy still has a lot of problems.”
The benchmark 10-year note yielded 3.32 percent as of 6:53 a.m. in London, according to Bloomberg Bond Trader. The 3.625 percent security due in February 2021 traded at 102 18/32. The yield advanced 13 basis points in the past three days.
Crude for April delivery traded at $102 a barrel, about 5 percent away from a 29-month high set March 7, on speculation allied bombing raids in Libya will prolong a supply disruption from Africa’s third-largest crude producer.
The national average price for unleaded gasoline in the U.S. was $3.549 a gallon, according to the American Automobile Association. The price climbed to $3.558 a gallon on March 13, also the most in 29 months.
Stronger Economy
Treasury bears say economic data this week will suggest the U.S. recovery is gaining momentum.
New home sales increased 2.1 percent in February from the previous month, according to a Bloomberg News survey before the Commerce Department report tomorrow. Orders for durable goods advanced for a second month, a separate survey showed before the department issues the figure on March 24.
“We’re still bearish,” said Tomohisa Fujiki, an interest- rate strategist at BNP Paribas Securities Japan Ltd. in Tokyo. “The U.S. economy is still on a recovery track.”
The Federal Reserve is scheduled to buy $6.5 billion to $8.5 billion of Treasuries due from September 2016 to February 2018 today as part of its effort to support the U.S. economy.
The difference between yields on 10-year notes and Treasury Inflation Protected Securities, or TIPS, a gauge of trader expectations for consumer prices, has widened to 2.43 percentage points from 1.91 percentage points six months ago.
Yield Forecast
The 10-year yield will advance to 3.92 percent by year-end, according to a Bloomberg survey of banks and securities companies with the most recent forecasts given the heaviest weightings. BNP, whose U.S. unit is one of the 20 primary dealers that trade directly with the Federal Reserve, forecasts 4.25 percent.
Bonds have benefited as investors sought the relative safety of government debt because of Japan and Libya.
Treasuries and Japanese government debt have both returned 0.4 percent since March 10, the day before the earthquake struck, according to indexes compiled by Bank of America Merrill Lynch.
Bonds in Germany are little changed, the indexes show, after European Central Bank President Jean-Claude Trichet indicated on March 18 he plans to raise interest rates in April.
German two-year notes yield 1.10 percentage point more than similar-maturity U.S. notes, the most since December 2008, when investors were snapping up Treasuries as a global economic recession deepened.
Quake Losses
Losses from Japan’s record earthquake and ensuing tsunami may total $200 billion to $300 billion, according to Risk Management Solutions Inc., which advises insurers and is based in Newark, California.
Japanese investors would be able to tap the $885.9 billion of U.S. debt that they hold to raise money. Japan is the second- largest foreign holder of U.S. debt behind China.
“Treasuries still have a higher yield compared to the Japanese bond market,” said Satoshi Okumoto, a general manager in Tokyo at Fukoku Mutual, which has the equivalent of $70.4 billion in assets. “We have a large yen-denominated portfolio. If we need funds, we can liquidate Japanese government bonds. That’s the first priority.”
Morgan Stanley agreed in a report March 18, calling Japan repatriation “irrelevant” for Treasuries.
U.S. 10-year notes yield 2.11 percent more than similar- maturity securities in Japan, versus the five-year average of 2.39 percentage points, according to data compiled by Bloomberg.
--Editors: Nicholas Reynolds, Nate Hosoda
To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.
To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.
