BLBG:Treasuries Snap Three-Day Gain Before Debt Sales
Treasuries snapped a three-day gain on concern yields that are approaching record lows will deter fund managers when the U.S. sells $66 billion of debt this week.
Investors should seek higher rates elsewhere than the government debt market, according to Boston-based Columbia Management Investment Advisers LLC, which oversees $344 billion. It favors high-grade company bonds and agency mortgage-backed securities such as those issued by Fannie Mae. Money managers scooped up Treasuries over the past three months as a haven from slowing economic growth and the debt crisis in Europe, sending yields tumbling.
“I’m going to refrain from purchasing for now,” said Hajime Nagata, who helps oversee the equivalent of $129.6 billion as an investor in Tokyo at Diam Co., a unit of Dai-Ichi Life Insurance Co., Japan’s second-biggest life insurer. “Yields are getting close to a historic low. If yields pick up, we will try to add. The U.S. economy is getting weaker.”
Ten-year notes yielded 1.51 percent as of 6:11 a.m. in London, according to Bloomberg Bond Trader data. The all-time low was 1.44 percent set June 1. The 1.75 percent security due in May 2022 changed hands at 102 5/32 today.
The Treasury Department is selling $32 billion of three- year notes today, $21 billion of 10-year debt tomorrow and $13 billion of 30-year bonds on July 12.
Three-year notes yielded 0.359 percent in pre-auction trading, versus 0.387 percent the last time the notes were sold on June 12.
Increased Demand
Investors submitted orders for 3.53 times the amount of available debt last month. The average over for the past 10 sales is 3.45.
Direct bidders, non-primary dealers buying for their own accounts, purchased 12 percent of the notes, the most since November. Indirect bidders, which include foreign central banks, bought 27 percent of the securities, the least since May 2007.
Demand for safety is helping push down yields in Japan and Germany.
Japan’s 10-year rate was at 0.795 percent after touching 0.79 percent, matching the least since 2003.
The yield on German two-year notes at negative 0.003 percent yesterday is unattractive, Nagata said, prompting him to sell the securities. He used the proceeds to buy high-grade euro-denominated corporate bonds, he said.
Spanish Yields
Spanish 10-year bonds fell yesterday, pushing the yield to more than 7 percent, on concern euro-area finance ministers meeting in Brussels this week would fail to find ways to help governments in the region pay their debts.
A U.S. report on July 6 showed the economy added 80,000 jobs in June, versus 100,000 projected by a Bloomberg News survey of economists, raising expectations the Federal Reserve will increase its bond purchases as it tries to spur growth.
The central bank is scheduled to buy as much as $1.5 billion of Treasury Inflation Protected Securities due from July 2018 to February 2042 today, according to the Fed Bank of New York website, part of its plan to extend the maturity of its holdings.
While Treasuries offer investors a degree of safety, money managers have also been willing to buy because of forecasts that inflation will stay in check, which would make it easier for the Fed to increase its bond purchases to fuel the economy.
The difference between yields on 10-year notes and same- maturity TIPS, a gauge of trader expectations for consumer prices over the life of the debt, has narrowed to 2.07 percentage points from this year’s high of 2.45 percent on March 20. The average over the past decade is 2.15 percentage points.
U.S. Inflation
Labor Department figures July 13 will probably show the U.S. producer price index slid for a third month in June with a 0.4 percent decline, according to the median estimate of economists surveyed by Bloomberg. Consumer prices were probably unchanged, after falling 0.3 percent in May, a separate survey of economists shows before the report July 17.
“I can’t see inflation picking up in the short term,” said Ali Jalai, who trades U.S. debt in Singapore at Scotiabank, a unit of Bank of Nova Scotia (BNS), one of the 21 primary dealers authorized to deal with the Fed. “The economy is so weak.”
Jalai said corporate debt is more attractive because Treasury rates are “too low,” echoing Columbia.
“Treasury yields have reached a level at which that asset class is losing its ability to act as a shock absorber in a portfolio,” Gene Tannuzzo, a portfolio manager at Columbia, wrote in a report on the company’s website yesterday.
An index of mortgage-backed securities yielded 44 basis points more than government securities, according to Bank of America Merrill Lynch data. Demand for the debt has narrowed the difference from 60 basis points at the end of 2011.
A gauge of U.S. corporate bonds yielded 2.95 percentage points more than Treasuries, versus 3.48 percentage points on Dec. 31, the figures show.
Treasuries have returned 2.5 percent this year, versus 2.2 percent for the mortgage bonds and 6.4 percent for the company debt, according to the bank.
To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net; Masaki Kondo in Singapore at mkondo3@bloomberg.net.
To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net
