BLBG:Treasuries Hold Gain As Bernanke May Emphasize Slowdown
Treasury yields extended last week’s declines after Angela Merkel signaled Germany is maintaining its stance on more central control in Europe, boosting demand for the safest assets as leaders struggle to contain the turmoil.
Benchmark 10-year yields were about four basis points, or 0.04 percentage point, from a record low amid speculation that Federal Reserve Chairman Ben S. Bernanke will highlight the need for low borrowing costs to spur the economy when he speaks tomorrow. U.S. retail sales probably rose in June for the first time in three months, economists forecast before a report today.
“Investors are focused on holding high-quality bonds, like Treasuries, as policy makers focus on accommodative policy and because of the problems in Europe,” said Piet Lammens, head of research at KBC Bank NV in Brussels. “What Bernanke says this week will be closely watched. We need to see a stronger indication that more stimulus is coming before the Treasury yields can make new lows.”
Ten-year notes yielded 1.488 percent as of 9:35 a.m. in London, according to Bloomberg Bond Trader prices. The 1.75 percent security due in May 2022 changed hands at 102 13/32. The two-year yield fell one basis point to 0.23 percent, the least since Feb. 3.
The 10-year yield dropped six basis points last week and reached an all-time low of 1.4387 percent on June 1.
Two weeks after a European Union summit aimed at bridging differences over crisis resolution, euro leaders are still squabbling over details of how to lift the bloc out of the turmoil. Chancellor Merkel chided member states who had sought to slow moves toward greater central control “since the first summit” in the almost three-year-old crisis.
‘No Chance’
“All of these attempts will have no chance with me or with Germany,” Merkel said yesterday in an interview with broadcaster ZDF in Berlin.
Bernanke is scheduled to testify before the Senate Banking Committee tomorrow, discussing the outlook for the economy and monetary policy. He will speak before the House Financial Services Committee a day later.
“There’s a flight to quality,” said Kevin Yang, who is in charge of bond investment in Taipei at Hontai Life Insurance Co., which has $6 billion in assets. “The Fed will maintain a low-interest-rate environment.”
The Fed under Bernanke bought $2.3 trillion of Treasury and mortgage-related debt to stimulate the economy. It decided in June to extend a policy known as Operation Twist, where it sells short-term securities and uses the proceeds to buy longer-term debt, to $667 billion from $400 billion.
Retail Sales
The central bank is scheduled to buy as much as $2 billion of Treasuries maturing from August 2022 to February 2031 today as part of the plan, according to the Fed Bank of New York’s website.
Bernanke has also pledged to keep the central bank’s target for overnight bank lending at almost zero through at least late 2014.
Sales at U.S. retailers probably rose 0.2 percent in June, following a 0.2 percent decline in May, according to the median forecast of 72 economists surveyed by Bloomberg News before the Commerce Department figures today.
The drop in yield made U.S. securities too expensive for Roger Bridges at Tyndall Investment Management Ltd.
“I wouldn’t buy them,” said Bridges, who oversees the equivalent of $15.3 billion of debt as the Sydney-based head of fixed income at Tyndall, a unit of Nikko Asset Management Co.
Hontai Life’s Yang said he plans to sell if the 10-year rate falls to 1.45 percent.
Vanguard Holdings
The term premium, a model created by the Fed that includes expectations for interest rates, growth and inflation, showed Treasuries were the most expensive ever last week. The gauge fell to a negative 0.9617 percent, a record low.
Vanguard Group Inc., whose $148.2 billion of Treasuries makes it the largest private owner of U.S. debt, says the nation has until 2016 to contain its borrowings before bond investors revolt and drive up interest rates.
“In the absence of a long-term credible plan, we are somewhere around four years away on where the markets are going to say ‘enough is enough,’” said Robert Auwaerter, head of the Valley Forge, Pennsylvania-based Vanguard’s fixed-income group since 2003 and who this year was inducted into the Fixed Income Analysts Society Inc.’s Hall of Fame.
The U.S. has avoided the turbulence rocking Europe, where five nations have sought bailouts as their borrowing costs soared because investors boycotted their bonds. Instead, they have sought U.S. assets as a haven because of the dollar’s status as the world’s primary reserve currency, pushing note yields to record lows even though the amount of public debt outstanding has grown to $15.9 trillion from less than $9 trillion in 2007.
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.
