BLBG:Treasury 10-Year Yield Is Near 6-Week High Before Fed Gives Rate Estimates
Treasury yields were three basis points from a six-week high before Federal Reserve policy makers issue projections for borrowing costs for the first time.
The U.S. is scheduled to sell $35 billion of five-year notes today and $29 billion of seven-year debt tomorrow. A $35 billion two-year auction yesterday drew stronger-than-average demand on speculation Treasuries will retain their refuge appeal as talks to restructure Greece’s debt reach a stalemate.
“In the short term, you can buy Treasuries because the Greece problem isn’t solved yet,” said Hiroki Shimazu, an economist in Tokyo at SMBC Nikko Securities Inc., a unit of Japan’s third-largest publicly traded bank by assets. “Longer term, I don’t recommend buying. The U.S. economy, even the housing market, is stronger than expected.”
U.S. 10-year yields held at 2.06 percent as of 2:28 p.m. in Tokyo, according to Bloomberg Bond Trader prices. The 2 percent security maturing in November 2021 changed hands at 99 14/32.
The yield climbed to 2.09 percent on Jan. 23, the most since Dec. 8. It will be 3.25 percent by year-end, Shimazu said.
Japan’s 10-year rate slid 1/2 basis point to 1 percent, the first decline in seven sessions.
The Federal Open Market Committee will probably keep the key rate unchanged today, a Bloomberg News survey of economists shows. After the meeting, policy makers will provide an explanation for their assessments along with rate predictions.
The central bank has left its target for overnight loans between lenders in a range of zero to 0.25 percent since 2008 and last month reiterated that economic conditions may warrant “exceptionally low” rates at least through mid-2013.
Low-Rate Extension
The Fed statements may “modify the existing language by extending the low-rate commitment to ‘at least through early 2014,’” according to a report yesterday by Priya Misra, Michael S. Hanson and Ruslan Bikbov at Bank of America Merrill Lynch in New York.
They may also show the median projection among policy makers is for a rate increase in the first quarter of 2014, according to the company, one of the 21 primary dealers that trade with the central bank.
Confidence (USHBMIDX) among U.S. homebuilders rose in January to the highest level in more than four years, the National Association of Home Builders/Wells Fargo reported on Jan. 18.
“Data remain positive, but insufficiently so to push yields to sustainably higher levels,” said a report yesterday by Dominic Konstam, the global head of interest-rate research for Deutsche Bank AG in New York.
A government report today will show U.S. home prices were unchanged in November after falling 0.2 percent in October, and private figures will show pending home sales dropped in December, Bloomberg surveys of economists show.
European Crisis
Greek officials and private bondholders are negotiating the size of losses that creditors are willing to accept.
The European Central bank’s decision last month to offer unlimited three-year loans to financial institutions as part of its efforts to contain the region’s debt crisis is working, according to Tsutomu Komiya, a bond investor in Tokyo at Daiwa Asset Management Co. in Tokyo.
“Europe remains a critical variable,” Deutsche Bank, another primary dealer, said in the report.
The three-month cross-currency basis swap, the rate banks pay to convert euro interest payments into dollars, was 75.25 basis points less than the euro interbank offered rate yesterday, according to data compiled by Bloomberg. The rate was the least expensive since August.
The measure has tightened from minus 162.5 basis points on Nov. 30, with a negative figure showing that European banks pay a premium to swap into dollar-based funding.
‘Risk-On Markets’
“The flight-to-quality movement has paused,” said Komiya, who helps oversee the equivalent of $118.8 billion at the unit of Japan’s second-biggest brokerage. “We will see risk-on markets in which equities and commodities rise and bond prices go down.”
U.S. 10-year yields will climb to 2.5 percent by mid-year, he said.
The U.S. two-year auction’s bid-to-cover ratio, which gauges demand by comparing orders with the amount of debt offered, was 3.75 yesterday, versus an average of 3.43 for the previous 10 sales.
The five-year notes being sold today yielded 0.925 percent in pre-auction trading, versus the record low of 0.88 percent at the prior sale on Dec. 20.
Investors bid for 2.86 times the amount offered in December, matching the average for the past 10 monthly auctions.
Indirect bidders, the category of investors that includes foreign central banks, bought 50.6 percent of the notes, the most in 16 months.
Treasury five-year notes have handed investors a 0.2 percent loss this year as of yesterday, versus a 0.8 percent decline for the broader market, according to indexes compiled by Bank of America Merrill Lynch.
U.S. corporate bonds have returned 0.7 percent, the figures show. The Standard & Poor’s 500 Index has gained more than 4 percent in the period after accounting for reinvested dividends, according to data compiled by Bloomberg.
To contact the reporters 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
