BLBG:Treasury Bonds Snap Last Week’s Drop as Summit Fails to Quell Euro Concern
Treasury 30-year bonds snapped a decline from last week after Germany’s top central banker damped speculation the European Central Bank will extend its role to help end the region’s two-year debt crisis.
Bill Gross, who runs the world’s biggest bond mutual fund at Pacific Investment Management Co., increased his holdings of Treasuries and mortgage debt in November as Europe’s fiscal woes worsened. The Federal Reserve’s $400 billion program to replace shorter-term debt will reduce rates on longer-dated government debt, the Bank for International Settlements said.
“Until you see a concrete resolution in Europe, this will remain a low-yield environment,” said Chungkeun Oh, a fixed- income trader in Seoul at Industrial Bank of Korea, South Korea’s largest lender to small- and medium-sized companies.
U.S. 30-year yields fell two basis points to 3.09 percent at 8:14 a.m. London time, according to Bloomberg Bond Trader prices. The 3.125 percent security due in November 2041 rose 10/32, or $3.13 per $1,000 face amount, to 100 20/32. The rate added eight basis points, or 0.08 percentage point, last week.
Ten-year yields were little changed at 2.05 percent, versus the record low of 1.67 set Sept. 23.
Bundesbank President Jens Weidmann told the Frankfurter Allgemeine Sonntagszeitung that while a European agreement on Dec. 9 to limit budget deficits represents “progress,” the onus is on governments rather than the Frankfurt-based ECB to resolve the crisis with financial backing. The interview was published Dec. 11. The European Union summit last week offered few new measures and doesn’t diminish the risk of credit-rating revisions, Moody’s Investors Service said in a report today.
Accord ‘Insufficient’
The accord is “insufficient,” Mohamed El-Erian, who is Pimco’s co-chief investment officer along with Gross, said in an interview with French newspaper Les Echos.
Government and Treasury debt as a percentage of Pimco’s $241 billion Total Return Fund (PTTRX) climbed to 23 percent from 19 percent the previous month, according to data on the Newport Beach, California-based company’s website Dec. 9. Mortgage securities, the largest holdings, increased to 43 percent from 38 percent in October.
Yields on U.S. Treasuries with more than eight years to maturity may decline about 22 basis points, Jack Meaning and Feng Zhu wrote in the Basel-based BIS’s quarterly report.
The Federal Reserve is replacing $400 billion of shorter maturities in its holdings of Treasuries with longer-term debt to cap borrowing costs in a plan it announced in September. It is scheduled to buy as much as $1.5 billion of Treasury Inflation Protected Securities due from 2018 to 2041 today as part of the program, according to the New York Fed’s website.
Debt Auctions
U.S. debt auctions over the next two weeks will probably total $177 billion, the largest concentration of so-called duration supply ever, JPMorgan Chase & Co. one of the 21 primary dealers that underwrite America’s borrowings, said in a report Dec. 9.
This week’s sales will consist of $78 billion in notes, bonds and inflation-linked debt in auctions starting today with $32 billion of three-year debt. The Treasury will announce on Dec. 15 how much it plans to raise in three offerings starting Dec. 19.
“The next two weeks will produce record duration supply in the Treasury market,” Terry Belton, JPMorgan’s head of U.S. debt strategy, wrote in the report. “The only other time in recent memory that the Treasury held six nominal auctions in consecutive weeks was in April/May 2009, when the market priced in a significant supply concession.”
Duration Supply
Ten-year yields climbed 40 basis points, or 0.40 percentage point, in the three weeks prior to the May 6, 2009, auction of the securities.
Duration supply, based on weighting Treasury securities by their sensitivity to changes in yield, increases as the U.S. sells more long-term debt. The sales planned through Dec. 21 are equivalent to issuing $114 billion of 10-year notes using this measure, according to JPMorgan.
“The sales will be difficult to digest,” said Hiroki Shimazu, an economist in Tokyo at SMBC Nikko Securities Inc., a unit of Japan’s third-largest publicly traded bank by assets. “Don’t buy longer-term bonds.”
Ten-year yields may climb as much as 10 basis points because of the debt sales, Shimazu said.
U.S. government debt has handed investors 9.3 percent this year, including reinvested interest, Bank of America Merrill Lynch indexes show. That compares with the 1.8 percent return on the Standard & Poor’s 500 index of stocks when dividends are included.
The rally in Treasuries accelerated since October even as reports showed improvements in everything from consumer confidence to jobless claims to manufacturing.
While government debt usually suffers as a strengthening economy spurs inflation and encourages investors to take bigger risks with their money, this recovery has been different because Europe’s sovereign-debt crisis has elevated the stress in the global financial system, bolstering demand for the most secure assets.
To contact the reporters on this story: Lucy Meakin in London at lmeakin1@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
