BLBG:Treasuries Rise a Third Day as Stocks Extend Slide on Europe Debt Concern
Treasuries rose for a third day as the spreading European debt crisis threatened the U.S. economy and stocks fell around the world.
A $29 billion seven-year sale scheduled for today is poised to draw a record-low yield, after rates dropped to the least ever at a $35 billion five-year auction yesterday, as investors sought the relative safety of U.S. debt. Mohamed A. El-Erian, chief executive officer at Pacific Investment Management Co., which runs the world’s biggest bond fund, said economic conditions are “terrifying.”
“I’m bullish on Treasuries,” said Masazumi Fukuoka, a senior dealer at the Singapore branch of Mitsubishi UFJ Trust & Banking Corp., a unit of Japan’s largest publicly traded lender. “Sovereign debt issues in Europe won’t easily be solved.”
U.S. 10-year yields declined two basis points to 1.90 percent as of 7:08 a.m. in London, according to Bloomberg Bond Trader prices. The 2 percent security maturing in November 2021 advanced 1/8, or $1.25 per $1,000 face amount, to 100 7/8.
Rates may decline to 1.5 percent by year-end, Fukuoka said, surpassing the prior record low of 1.67 percent set Sept. 23. The yield may approach 1.75 percent said Deutsche Bank AG, one of the 21 primary dealers that underwrite the U.S. debt, in a report yesterday.
“Negative news from Europe” will drive the market, according to the report by Dominic Konstam, the New York-based global head of rates research at Deutsche Bank.
Bond trading was shut in Japan today for a holiday and is scheduled to close worldwide tomorrow for Thanksgiving.
Europe Negatives
The MSCI Asia Pacific Index of shares (MXAPJ) excluding Japan dropped 2.3 percent. The MSCI All Country World Index of stocks fell 0.4 percent, sliding for an eighth day. An preliminary index of Chinese factory activity reported by HSBC Holdings Plc and Markit Economics fell to 48 for November from 51 in October.
Germany rejected calls yesterday from allies and investors to do more to end market turmoil as Spain’s financing costs climbed and pressure increased on Greek leaders to submit written promises to implement austerity measures.
The odds of the U.S. returning to recession are as high as 50 percent, El-Erian said in an interview yesterday on Bloomberg Television’s “In the Loop” with Betty Liu and Dominic Chu.
Underwater Mortgages
“What I find most terrifying,” he said, “we are having this discussion about a risk of recession at a time when unemployment is already too high, at a time when a quarter of homeowners are underwater on their mortgages.”
Treasuries returned 9.3 percent this year as of yesterday, while German bunds rallied 8.2 percent, according to Bank of America Merrill Lynch data. U.S. company debt advanced 5.3 percent, the figures show. The MSCI All Country World Index has handed investors a 6 percent loss.
Franklin Templeton Investments favors corporate bonds, and it is betting Treasury yields have fallen too low.
Credit markets are “too pessimistic” given that Europe and the U.S. aren’t likely to suffer deep recessions, said David Zahn, who helps oversee $694.1 billion as a London-based portfolio manager in the fixed-income group. Debt sold by industrial companies in Europe and the U.S. is attractive, Zahn said in an interview yesterday in Sydney.
Consumer spending in the U.S., the biggest part of the economy, probably rose 0.3 percent in October, after increasing 0.6 percent in September, according to a Bloomberg News survey of economists before the Commerce Department issues the figure today. Orders for durable goods other than transportation stabilized after rising the most in six months, separate figures may say.
Consumer Spending
Today’s data will also show the Federal Reserve’s preferred price measure quickened last month, according to the Bloomberg surveys.
The inflation gauge, which is tied to spending and excludes food and fuel costs, probably increased 1.7 percent in October from the year before, versus 1.6 percent in September. The reading would match the highest level since March 2010.
Traders have cut bets on inflation this month, yields indicate.
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, narrowed to 1.86 percentage points from 2.08 percentage points on Oct. 31. The five-year average is 2.04 percentage points.
The U.S. seven-year notes being sold today yielded 1.40 percent in pre-auction trading, versus 1.791 percent at the previous sale of the securities on Oct. 27. The record low was 1.496 percent on Sept. 29.
‘Flight-to-Quality’
Investors bid for 2.59 times the amount offered last month, the least since May 2009.
The five-year notes auctioned yesterday drew a record low yield of 0.937 percent. Investors at the two-year sale Nov. 21 bid for 4.07 times the amount of debt available, the most ever.
“We are experiencing a significant flight-to-quality bid here, particularly with what’s happening in Europe,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors. “There’s renewed concern about what’s happening to our economy.”
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.
