BLBG:Treasuries Drop On Speculation Growth To Lift Yields
Treasuries fell on speculation the U.S. economy won’t slow enough to justify keeping yields at the record lows set last week.
Government securities interrupted a rally driven by Europe’s fiscal crisis and U.S. employment data that fell short of economists’ forecasts. The benchmark 10-year yield had dropped so much that it “does not make sense,” said David Kotok, who oversees more than $2 billion at Cumberland Advisors in Sarasota, Florida. A technical indicator showed the rally is poised to end.
“If we go back on a slow-growth path, then bonds are super expensive,” said Peter Jolly, head of market research at National Australia Bank Ltd. (NAB) in Sydney. “They’re only reasonably priced if you think we’re going into a deep global recession.”
Benchmark 10-year yields increased four basis points, or 0.04 percentage point, to 1.49 percent as of 7:03 a.m. in London, according to Bloomberg Bond Trader data. The 1.75 percent note maturing in May 2022 declined 10/32, or $3.13 per $1,000 face amount, to 102 13/32. The all-time low yield was 1.4387 percent set June 1.
Trading of Treasuries closed at 3 p.m. Tokyo time and will stay shut during London market hours in observance of the U.K. Spring Bank Holiday, according to the New York-based Securities Industry and Financial Markets Association. Trading in New York will take place as usual, the schedule shows.
Long Bonds
Thirty-year bonds, among the securities most sensitive to inflation because of their longer maturity, are outperforming the rest of the market.
The extra yield investors demand to buy the so-called long bonds instead of 10-year notes narrowed to 1.07 percentage points on June 1, the least in more than four months based on closing levels. The spread has averaged 70 basis points over the past decade.
Japan’s 10-year rate rose one basis point to 0.815 percent today. It earlier dropped as low as 0.79 percent, a level not seen since 2003. Australian yields tumbled to all-time lows, with the 10-year rate sliding to 2.698 percent.
The 14-day relative-strength index for 10-year Treasury yields was at 25.3. A reading less than 30 suggests to some traders that rates have declined too quickly and are set to change direction.
No Sense
“We will not buy the 10-year Treasury note,” Kotok wrote in a report June 2. “It does not make sense to us. The evidence for a deepening recession is not there.”
The economy will grow 2.3 percent in 2012, versus 1.7 percent in 2011, a Bloomberg News survey showed.
U.S. government bond rates tumbled last week after a report showed the nation added 69,000 jobs in May, versus 150,000 projected by a separate Bloomberg poll of economists. The unemployment rate unexpectedly rose to 8.2 percent from 8.1 percent.
German Chancellor Angela Merkel hardened her opposition to joint debt sharing in the euro area in a speech June 2, amid speculation Greece will abandon the common currency as it battles a recession, fueling demand for the relative safety of U.S. debt.
While Treasuries lost 1.3 percent in the first quarter as bond prices fell and 10-year yields rose to 2.4 percent, they have since returned 3.9 percent, Bank of America Merrill Lynch indexes show. Rising concern that Greece will exit the euro, increasing unemployment in the U.S. and Europe along with slowing Chinese manufacturing growth drove investors to the safety of U.S. debt.
Bets Off
“When all bets are off there is a race to the most liquid and safest assets,” Michael Brandes, global head of fixed- income strategy for Citi Private Bank, a unit of Citigroup Inc., with $250 billion in assets under management, said in a May 31 interview. “We are more likely to see the 10-year yield stay around these levels, or decline further, than to go back to 2 percent anytime soon unless we get a positive surprise.”
Strategists at New York-based JPMorgan Chase & Co., which in early April forecast 10-year yields would rise to 2.5 percent, said in a report June 1 that it lowered its estimate to 1.4 percent. Goldman Sachs Group Inc. and Credit Suisse Group AG also cut their forecasts.
Morgan Stanley, who along with JPMorgan, Goldman Sachs and Credit Suisse are among the 21 primary dealers of U.S. government securities that trade with the Federal Reserve, said June 1 that the probability of the central bank adding more stimulus when its current effort winds down this month is 80 percent, up from 50 percent.
Fed Purchases
The Fed is replacing $400 billion of shorter-term debt in its holdings with longer maturities to keep borrowing costs down. The central bank plans to buy as much as $5.25 billion of Treasuries due from June 2018 to May 2020 today as part of the program, according to the Fed Bank of New York’s website.
All of the 69 economists surveyed by Bloomberg predict 10- year yields will rise by year-end. The rate will climb to 2.41, based on the responses, with the most recent projections given the heaviest weightings.
To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.
To contact the editor responsible for this story: Garfield Reynolds at greynolds1@bloomberg.net
