BLBG:Treasuries Snap Loss as Italian Sales to Test Demand
Treasuries halted a slide from yesterday before Italy sells bonds, testing investor appetite for European securities and fueling demand for the relative safety of U.S. debt.
Spanish 10-year yields surged to as high as 6 percent yesterday, approaching the levels that pushed Greece, Ireland and Portugal into bailouts. The U.S. plans to auction $13 billion of 30-year bonds today. BlackRock Inc. (BLK), the world’s biggest asset manager, said a bear market in Treasuries is “extremely unlikely.”
“There’s still a lot of worry about Spain and Italy,” said Kazuaki Oh’e, a debt salesman in Tokyo at CIBC World Markets Japan Inc., a unit of Canada’s fifth-largest lender. “Where else are people going to buy if they want to put their money in a safety box? You need to choose the U.S. market.”
Ten-year notes yielded 2.04 percent as of 7:36 a.m. in London, according to Bloomberg Bond Trader prices. The 2 percent security due in February 2022 changed hands at 99 22/32. Yields will rise to 2.4 percent at the end of June as the economy improves, according to CIBC.
Italy is scheduled to sell as much as 5 billion euros ($6.56 billion) in debt maturing in 2015, 2020 and 2023.
Japan’s 10-year rate was unchanged at 0.95 percent.
Yield Forecast
U.S. 10-year yields may be between 2.5 percent and 3 percent in the months ahead, Robert Doll, the chief equity strategist at New York-based BlackRock, wrote in a report yesterday.
“For yields to move beyond that, however, would require either a significant acceleration in economic growth or a marked increase in inflation expectations -- neither of which appears likely,” the report said. “It seems extremely unlikely that we are at the forefront of a significant bond bear market.”
Treasuries fell yesterday, interrupting a five-day rally.
Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., cut holdings of U.S. government securities last month to 32 percent of assets, the lowest level since December, and raised mortgages to the most since 2009. U.S. government and Treasury debt represented 37 percent of the $252.4 billion Total Return Fund (PTTRX) in February, according to a report on the company’s website yesterday.
Federal Reserve Vice Chairman Janet Yellen endorsed the central bank’s “highly accommodative” policy, saying it probably won’t achieve its goal of full employment for years.
‘Far Short’
“Over the next several years, I anticipate that we will fall far short in achieving our maximum employment objective, and I expect inflation to remain at or below” the Fed’s 2 percent target, Yellen said yesterday in a speech in New York. She said housing and the European debt crisis are among “significant headwinds” that may restrain growth. The Fed targets the annual price index tied to personal spending.
The central bank is scheduled to buy as much as $5 billion of Treasuries due from May 2020 to February 2022 today, according to the New York Fed’s website. The central bank is replacing $400 billion of shorter-term debt in its holdings with longer maturities to hold down borrowing costs.
Policy makers have said economic conditions will probably lead them to keep the benchmark interest rate at almost zero through at least late 2014.
Consumer Prices
The U.S. Labor Department is scheduled to report producer prices today and consumer prices tomorrow. Both rose 0.3 percent in March, after advancing 0.4 percent in February, according to Bloomberg News surveys of economists. The U.S. trade deficit was probably little changed, a separate report today will show, economists said.
The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, was 2.32 percentage points. The average over the past decade is 2.14 percentage points.
Consumer prices rose 2.9 percent in February from the year before, meaning 10-year notes yield negative 88 basis points after subtracting costs in the economy. The so-called real yield has been negative for almost a year. Tomorrow’s report may show annual price gains slowed to 2.7 percent, based on Bloomberg surveys.
30-Year Sale
The 30-year bonds being sold today yielded 3.2 percent in pre-auction trading, versus 3.383 percent at the prior sale in March.
Investors bid for 2.7 times the amount of debt offered last month, versus the average of 2.65 percent for the past 10 of auctions.
The government is also scheduled to announce the size of a five-year sale of Treasury Inflation Protected Securities scheduled for April 19. The auction will probably be for $16 billion, according to Wrightson ICAP LLC, an economic advisory company in Jersey City, New Jersey, that specializes in government finance.
Thirty-year Treasuries, among the most sensitive to inflation because of their long maturity, have surged 3.2 percent this month, according to Bank of America Merrill Lynch indexes. The company’s U.S. Treasury Master index advanced 1 percent.
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
