BLBG:Treasury Yield Close To Record Low On Europe Debt Crisis
Treasuries fell for a second day on speculation record-low yields will curb demand when the U.S. auctions $99 billion of coupon-bearing debt beginning tomorrow.
The government plans to start the sales with $35 billion of two-year notes, followed by the same amount of five-year debt on May 23 and $29 billion of seven-year securities on May 24. Seven-year yields slid to 1.135 percent May 18, the least ever, raising concern U.S. bonds are becoming too costly. The German and French finance ministers plan to meet today on the euro, after Europe’s debt crisis sent Treasuries surging last week as investors sought the relative safety of U.S. securities.
“They’re far too expensive,” said Roger Bridges, who oversees the equivalent of $14.8 billion of debt as the Sydney- based head of fixed income at Tyndall Investment Management Ltd., a unit of Nikko Asset Management Co. “I wouldn’t have thought people would want to load up here.”
Ten-year yields rose three basis points, or 0.03 percentage point, to 1.75 percent as of 6:39 a.m. in London, Bloomberg Bond Trader data show. The 1.75 percent security due in May 2022 declined 9/32, or $2.81 per $1,000 face amount, to 99 31/32. The yield increased three basis points on May 18.
Bridges favors shorter maturities, those that will fall least if yields rise, he said.
Japan’s 10-year rate increased 2 1/2 basis points to 0.855 percent. It was as low as 0.815 percent on May 18, a level unseen since 2003.
European Meeting
German Finance Minister Wolfgang Schaeuble will discuss the 17-nation currency at a meeting with his newly installed French counterpart, Pierre Moscovici, in Berlin as European Union leaders prepare for a summit May 23. Greece’s efforts to combat a recession are raising concern it will abandon the euro.
Treasuries returned 1.5 percent in the past month as of May 18, Bank of America Merrill Lynch indexes show, reflecting demand for safety. Investors tracking the MSCI All-Country World Index of stocks lost 8.2 percent in the same period.
U.S. government securities will fall later in 2012 as gross domestic product growth quickens, according to Hiroki Shimazu, an economist in Tokyo at SMBC Nikko Securities Inc., a unit of Japan’s third-largest publicly traded bank by assets.
“The U.S. economy continues to recover,” he said.
Factory bookings for long-lasting goods rose 0.3 percent last month after tumbling 3.9 percent in March, according to the median forecast of 61 economists surveyed by Bloomberg News before the Commerce Department issues the number on May 24. Other data this week will probably show purchases of existing and new houses increased, according to separate surveys.
Labor Market
Job gains have fallen short of what analysts expected, and the unemployment rate has been more than 8 percent for three years.
Ten-year yields will increase to 2.48 percent by year-end, according to the average forecast in a Bloomberg survey of financial companies.
Bond traders are cutting expectations for U.S. inflation by the most since December. If their bets are right, Federal Reserve Chairman Ben S. Bernanke may have the scope for additional stimulus.
With six weeks left before the end of the Fed’s $400 billion swap of short-term debt for longer-term securities in a program known as Operation Twist, securities that protect against rising consumer prices and forwards measuring the outlook for inflation show diminished concerns. Traders are pricing in a 55 percent chance that the central bank will begin new efforts to spur economic growth, Bank of America Corp. says.
Fed Stimulus
Speculation has risen that the central bank may need to add to the $12.8 trillion already spent to avert a second recession in three years. Jobs are growing more slowly than forecast and Bernanke said April 25 that the Fed remains “prepared to do more as needed.” For first time since it announced Operation Twist in September, the Fed’s preferred gauge of measuring traders’ inflation expectations is poised to fall for a second straight month.
The central bank plans to buy as much as $2 billion of Treasuries due from February 2036 to May 2042 today as part of its debt-swap program, according to the Fed Bank of New York’s website.
“It’s not only a weak economy, but as inflation comes down, it could be another reason for the Fed to implement some more stimulus,” said Gary Pollack, head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York, which manages $12 billion, in a May 14 interview.
The difference in yields between 10-year notes and Treasury Inflation Protected Securities, which represents traders’ expectations for the rate of inflation over the life of the bonds, fell to 2.04 percentage points on May 17. It was the least since Jan. 23.
The five-year, five-year forward break-even rate, which gauges the average inflation rate between 2017 and 2022, dropped to 2.43 percent on May 16, from a 2012 high of 2.78 percent on March 19. The rate slid nine basis points in April, the biggest monthly decline since December.
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.
