BLBG:Treasuries Snap 5-Day Rally After Data Shows China Manufacturing Expanded
Treasuries snapped a five-day rally after China unexpectedly reported growth in its factories and as economists said industry figures today in the U.S. will show manufacturing expanded at the fastest pace since June.
U.S. government securities halted their advance before the Treasury announces today the amount of three-, 10- and 30-year debt it plans to sell over three days starting Feb. 7. Bonds will provide “muted” returns over the coming decade, according to Vanguard Group Inc., which manages $1.65 trillion in assets. Manufacturing is helping the U.S. and China, the world’s biggest economies, reducing demand for the relative safety of U.S. debt.
“China’s growth is not as weak as people expected,” said Bin Gao, Hong Kong-based head of rate research for Asia and the Pacific at Bank of America Merrill Lynch, one of the 21 primary dealers that underwrite the U.S. debt. “That should be bad news for Treasuries. It reduces the chance for the People’s Bank of China to ease” monetary policy.
The benchmark 10-year yield rose one basis point, or 0.01 percentage point, to 1.81 percent at 8:02 a.m. in London, according to Bloomberg Bond Trader prices. The 2 percent note due in November 2021 fell 3/32, or 94 cents per $1,000 face amount, to 101 22/32. The yield dropped to a record 1.67 percent on Sept. 23.
Five-year notes yielded 0.72 percent after declining to an all-time low 0.6981 percent yesterday.
Unexpected Growth
China’s purchasing managers’ index rose to 50.5 in January from 50.3 in December, the statistics bureau and logistics federation said. The figure compares with a median estimate of 49.6 in a Bloomberg News survey of economists. A reading above 50 indicates growth.
The Institute for Supply Management’s U.S. factory index climbed to 54.5 last month from 53.1 in December, according to a separate Bloomberg survey. ADP Employer Services will say companies added 182,000 workers in January, versus 325,000 in December, another survey shows.
“The return outlook for broad bond portfolios is muted,” Vanguard said in a press release yesterday, citing research by Joe Davis, head of the investment strategy group, and Roger Aliaga-Diaz, a senior economist. “The diversification benefits of bonds are expected to persist despite the tendency for slightly higher interest rates over the next decade,” according to Vanguard, which is based in Valley Forge, Pennsylvania.
Swap Spreads
So-called swap spreads narrowed, indicating growing demand for higher-yielding assets versus sovereign debt. The difference between the two-year swap fixed rate and the yield on same maturity Treasuries shrank as low as 28 basis points today, the least since September. Investors use swaps to exchange fixed and floating interest-rate obligations.
Next week’s debt sales comprise the U.S. government’s quarterly refunding, which is held each February, May, August and November. The Treasury has sold $32 billion in three-year notes, $24 billion in 10-year debt and $16 billion in 30-year bonds in each refunding since November 2010.
Demand for the haven of U.S. notes during Europe’s fiscal crisis sent Treasuries surging over the past 12 months. Greece is pressing bondholders to forgive some of its debt, raising speculation Portugal will try to do the same.
Germany’s 10-year bonds declined for the first time in six days, pushing the yield up by two basis points to 1.81 percent. German bunds yielded more than Treasuries for the first time since Jan. 2 based on closing prices.
U.S. debt due in 10 years and longer has jumped 32 percent in the past year, the most among 144 government-bond indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies after accounting for currency changes.
Fed Purchases
The Federal Reserve said Jan. 25 it plans to keep its benchmark interest rate near zero until at least the end of 2014. Chairman Ben S. Bernanke said he is considering buying bonds to sustain the expansion.
“The Fed won’t raise rates for a long time,” said Tsutomu Komiya, a debt investor in Tokyo at Daiwa Asset Management Co., which oversees the equivalent of $120.7 billion. “This stance gives the market a green light to buy.”
Ten-year yields will probably be less than 2 percent for the next few weeks, he said.
The Fed is replacing $400 billion of shorter-maturity Treasuries in its holdings with longer-term debt to cap borrowing costs under a program it announced in September and plans to conclude in June.
The central bank plans to purchase as much as $2 billion of securities maturing from August 2022 to February 2031 today as part of the plan, according to the New York Fed’s website.
Borrowing costs won’t hold at current levels through 2012, Bloomberg surveys of economists show. The 10-year rate will advance to 2.59 percent by year-end, based on the responses, with the most recent forecasts given the heaviest weightings.
To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@hotmail.com Wes Goodman in Singapore at wgoodman@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
