BLBG:Treasuries Advance On Bets Central Banks To Boost Easing
Treasuries advanced along with the bonds of other highly rated nations amid speculation central banks around the world will take more action to cap borrowing costs, and as demand for the safest securities increased.
U.S. 10-year yields dropped to within five basis points of a record low, while bonds also rallied in Germany, the U.K., Japan and Australia. Longer-maturity bonds led gains in Treasuries after South Korea and Brazil took steps to counter the global economic slowdown following European Central Bank and Bank of England measures last week. Thirty-year bonds rose for the fifth time in six days before the government sells $13 billion of the securities today.
“There is a trend toward global easing and that is going to be supportive for Treasuries and government bonds in general,” said Vincent Chaigneau, global head of interest-rate strategy at Societe Generale SA in Paris. “The extremely low yields are justified by the fact that the global economy is slowing down and the Fed may add more stimulus.”
The 10-year Treasury yield fell four basis points, or 0.04 percentage point, to 1.48 percent at 6:50 a.m. in New York, according to Bloomberg Bond Trader prices. The 1.75 percent security due in May 2022 rose 10/32, or $3.13 per $1,000 face amount, to 102 14/32. The yield dropped to a record 1.4387 percent on June 1.
Ten-year rates may drop to as low as 1.2 percent this quarter, Chaigneau said.
Thirty-year yields fell three basis points to 2.59 percent, approaching the all-time low 2.5089 percent also set on June 1.
Fed Minutes
A few Fed policy makers said the central bank will probably need to take more action “to promote satisfactory growth in employment and to ensure that the inflation rate would be at the Committee’s goal,” according to minutes released yesterday after the Federal Open Market Committee’s June 19-20 meeting. The central bank’s next policy decision is due on Aug. 1.
The Bank of Korea cut borrowing costs for the first time in more than three years today, lowering its seven-day repurchase rate to 3 percent from 3.25 percent. Brazil reduced its benchmark for an eighth meeting to 8 percent yesterday. The Bank of Japan (8301) bolstered its asset-purchase fund while cutting a credit-loan facility by the same amount.
The ECB cut interest rates by 25 basis points to 0.75 percent on July 5 and the Bank of England expanded its bond- buying program the same day.
Slower Growth
Global economic growth will slow to 2.26 percent this year from 2.9 percent in 2011, a Bloomberg News survey showed.
“There’s a possibility that yields will go lower,” said Yoshiyuki Suzuki, head of fixed income in Tokyo at Fukoku Mutual Life Insurance Co., which has the equivalent of $69 billion in assets. “The central bank may continue purchases of bonds. There are only a few risk-free assets, and people don’t want to take risks.”
Japan’s 10-year bond yield dropped two basis points to 0.765 percent, the lowest since 2003. German two-year yields declined to a record low and were below zero for the fifth straight day.
Australia’s 10-year yield dropped as much as 11 basis points to 2.87 percent, while similar-maturity French rates declined eight basis points to 2.24 percent. U.K. 10-year yields fell five basis points to 1.51 percent.
The U.K. sold 3.5 billion pounds ($5.41 billion) of 10-year gilts today at a record low yield of 1.719 percent.
‘Scarce’ Yield
The decline in benchmark borrowing costs has sparked a search for higher yields outside the government bond market.
Investors have poured almost $11 billion into equity income funds and $80 billion into corporate bond funds this year, according to a July 10 report by Bank of America Merrill Lynch, one of the 21 primary dealers that trade directly with the U.S. central bank.
“Yield continues to be a scarce, and thus a coveted asset,” according to the report by Michael Hartnett and Kate Moore, strategists for the bank in New York.
The term premium, a model created by the Fed that includes expectations for interest rates, growth and inflation, showed Treasuries are the most expensive ever. The gauge fell to a record negative 0.9617 percent on July 10. It was negative 0.9587 percent today.
The 30-year Treasuries being sold today yielded 2.59 percent in pre-auction trading, versus 2.72 percent at the prior sale June 14. Investors bid for 2.4 times the amount of debt offered, the least since November at the monthly auctions.
Bond Auction
The U.S. sold $21 billion of 10-year notes at an all-time low rate of 1.459 percent yesterday as the auction attracted record-high demand from a group of investors that include pension funds and insurance companies.
Thirty-year bonds have returned 7.8 percent this year, compared with 5 percent for 10-year notes and 0.1 percent for two-year debt, according to indexes compiled by Bank of America Merrill Lynch.
The Fed bought $2.3 trillion of securities in two rounds of so-called quantitative easing from 2008 to 2011 to support the economy. In September it embarked on a plan to replace $400 billion of short-maturity Treasuries in its portfolio with longer-term debt to cap borrowing costs. It expanded the effort on June 20 by $267 billion and extended it until year-end.
The central bank plans to sell as much as $8 billion of securities due from July 2013 to January 2014 today as part of the program, according to the Fed Bank of New York website.
To contact the reporters on this story: Emma Charlton in London at echarlton1@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
