BLBG:Treasuries Snap Gain As U.S. To Begin Note Auctions
Treasuries snapped a gain from yesterday on concern yields within 20 basis points of record lows will damp demand when the U.S. auctions $99 billion of notes this week, starting with a two-year sale today.
The two-year offering faces an extra hurdle from the Federal Reserve, which is selling short-term debt from its holdings to buy longer maturities. The Fed announced last week that it plans to extend the program, known as Operation Twist, through year-end to spur the economy. JPMorgan Chase & Co., the biggest U.S. bank, favors investment-grade corporate bonds.
“Yields will rise,” said Kei Katayama, who buys U.S. government debt in Tokyo at Daiwa SB Investments Ltd., which manages the equivalent of $62.2 billion and is a unit of Japan’s second-largest brokerage. “The two-year auction may have difficulties because of Operation Twist. The U.S. economy is not very strong, but I expect steady growth.”
Benchmark 10-year yields increased one basis point, or 0.01 percentage point, to 1.61 percent as of 6:25 a.m. in London, Bloomberg Bond Trader data show. The 1.75 percent security due in May 2022 fell 2/32, or 63 cents per $1,000 face amount, to 101 9/32.
Katayama said he is favoring shorter maturities, those that will fall the least in price if yields rise, even after long- term bonds beat the rest of the market this year.
Yield Spread
The extra yield that 30-year bonds offer over 5-year notes narrowed to 1.97 percentage points from 2012’s high of 2.39 percentage points in February.
Japan’s 10-year rate was little changed at 0.82 percent. It has declined from 2012’s high of 1.06 percent set in March.
Treasuries rose yesterday as investors sought refuge on speculation European leaders will fail to stem the euro bloc’s debt crisis at a two-day summit starting June 28. Banco Santander SA (SAN) and Banco Bilbao Vizcaya Argentaria SA (BBVA) were among 28 Spanish banks downgraded by Moody’s Investors Service yesterday.
Demand for safety during Europe’s debt crisis helped the Treasury market return 1.9 percent in 2012 as of yesterday, according to Bank of America Merrill Lynch indexes. Thirty-year bonds surged 5.8 percent.
The MSCI All-Country World Index (MXWD) of stocks also gained 1.9 percent with dividends, while the Standard & Poor’s GSCI Total Return Index of metals, fuels and agricultural products fell 12 percent.
Stock Returns
U.S. corporate bonds returned 5 percent, the Bank of America Merrill Lynch figures show. The securities are a haven as growth slows, Jan Loeys, the chief market strategist at JPMorgan Chase, said yesterday.
“High-grade credit overall is the best place to be,” he said on Bloomberg Television’s “Lunch Money” with Stephanie Ruhle and Adam Johnson. “Get out of equities.”
Two-year notes yielded 0.30 percent ahead of today’s $35 billion sale, versus the record low of 0.14 percent in September. The government plans to auction the same amount of five-year securities tomorrow and $29 billion of seven-year debt on June 28.
Investor appetite for the safest securities helped increase bidding at the prior two-year auction on May 22. Money managers submitted orders to buy 3.95 times the amount of available debt, the most since November at the monthly auctions.
Indirect bidders, the category of buyers that includes foreign central banks, purchased 33.5 percent of the securities, versus 32.1 percent in April.
Twist Extended
Fed officials led by Chairman Ben S. Bernanke last week extended Operation Twist by $267 billion through the end of 2012. The central bank plans to buy as much as $5.5 billion of Treasuries due from August 2020 to May 2022 today, according to the Fed Bank of New York’s website.
The central bank also repeated its pledge to keep its target for overnight bank lending at almost zero through at least late 2014. The two-year yield, which tends to track the Fed’s benchmark because of its shorter maturity, has held to a range of 0.20 percent to 0.41 percent this year.
Policy makers cut their estimate for 2012 growth to a range of 1.9 percent to 2.4 percent, from 2.4 percent to 2.9 percent in April.
“We’d like to buy more bonds” in the U.S., said Hideo Shimomura, who helps oversee the equivalent of $75.2 billion in Tokyo as chief fund investor at Mitsubishi UFJ Asset Management Co., a unit of Japan’s biggest publicly traded bank. “The economic situation is getting worse. The Fed may do further stimulus.”
Treasury investors are losing less to inflation as growth slows. Ten-year notes yield about minus 10 basis points after accounting for consumer prices, the most in almost 13 months.
Yields on five-year inflation swaps, which allow holders to exchange fixed interest rates for returns equivalent to the consumer price index, show investors expect prices to rise at an average annual rate of 1.98 percent over the next five years. The figure is the least since January based on closing levels.
U.S. 10-year yields will rise to 2.15 percent by year-end, according to the average forecast in a Bloomberg survey of economists.
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.
