BLBG:Treasuries Decline On Concern Low Yields To Reduce Demand
Treasuries fell on concern a plunge in yields to record lows yesterday will erode demand, as investors prepared to bid at the last of three U.S. note auctions being held this week.
Daiwa SB Investments Ltd. and Hontai Life Insurance Co. both say Treasuries have become too expensive. The term premium, a model created by economists at the Federal Reserve that includes expectations for interest rates, growth and inflation, dropped on July 24 to negative 1.02 percent, the most expensive level on record. It was negative 0.99 today. A negative reading indicates investors are willing to accept yields below what’s considered fair value.
“Yields are too low,” said Kei Katayama, who buys Treasuries at Daiwa SB, which manages the equivalent of $63.5 billion and is a unit of Japan’s second-largest brokerage. “This rally is almost over.” A recovery in the U.S. housing market will keep rates from falling much further, he said.
Benchmark 10-year rates rose to 1.41 percent as of 6:55 a.m. in London from the all-time low of 1.379 percent yesterday, according to Bloomberg Bond Trader data. The 1.75 percent security due in May 2022 fell 1/8, or $1.25 per $1,000 face amount, to 103 2/32.
Investor Bets
Daiwa SB favors shorter maturities, those that will fall least if yields rise, said Katayama, who is based in Tokyo.
Hontai Life set a bet against Treasuries this week, said Kevin Yang, the Taipei-based head of bond investment for the company. Hontai Life has $6 billion in assets.
The Treasury Department is scheduled to sell $29 billion of seven-year debt today. It auctioned $35 billion of five-year notes yesterday and the same amount of two-year securities on July 24.
Japan’s 10-year rate climbed to 0.73 percent. It was at 0.72 percent earlier today, matching the lowest since 2003.
Benchmark Treasury yields dropped to a record yesterday as signs of a global economic slowdown boosted demand for the relative safety of U.S. government debt.
Sales of new homes were at a 350,000 annual pace in June, according to a report yesterday, missing economist estimates for a 372,000 rate.
U.S. Economy
The Commerce Department may say today that orders last month for durable goods, or those meant to last at least three years, climbed 0.3 percent, according to the median forecast in a Bloomberg News survey. The figure compares with a 1.3 percent advance in May. A report from the National Association of Realtors today may show gains in sales of previously owned homes slowed to 0.3 percent in June from a 5.9 percent rate in in the previous month, according to a separate poll.
Yields on Spain’s two-, five-, 10- and 30-year government securities climbed to euro-era highs this week amid speculation the nation will need a bailout to backstop its regions and banks.
“The European crisis has dragged down the U.S. economy,” said Kim Youngsung, head of fixed income in Seoul at Samsung Asset Management Co., South Korea’s biggest fund manager. “Everyone just wants to buy Treasuries. Yields will go down a little bit further.”
The 10-year yield will drop another 10 basis points over the next month, Kim said.
Treasury investors are increasing the yield on their holdings by swapping shorter maturities for longer ones, 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.
Yield Spread
Thirty-year Treasuries yield 1.05 percentage points more than 10-year notes. The spread has narrowed from this year’s high of 1.23 percentage points set in May. The average over the past decade is 0.7 percentage point.
The U.S. central bank plans to buy as much as $2 billion of Treasuries due from February 2036 to May 2042 today, according to the Fed bank of New York’s website. The purchases are part of the bank’s plan to put downward pressure on borrowing costs by swapping short-term Treasuries in its holdings for longer maturities.
The Fed bought $2.3 trillion of mortgage and Treasury debt from 2008 to 2011 in two rounds of so-called quantitative easing, seeking to cap borrowing costs. Policy makers next meet on July 31 and Aug. 1. They have kept benchmark borrowing costs in a range between zero and 0.25 percent since December 2008.
Bailout Fund
The rally came to a halt yesterday on speculation that Europe’s policy makers will boost the firepower of their bailout fund.
European Central Bank council member Ewald Nowotny said there are arguments in favor of granting the region’s rescue fund a banking license, giving it access to ECB lending.
Ten-year yields will rise to 1.86 percent by year end, according to a Bloomberg survey of financial companies with the most recent projections given the heaviest weightings.
The U.S. seven-year notes being sold today yielded 0.938 percent in pre-auction trading, poised to draw a rate less than 1 percent for the first time.
Investors bid for 2.64 times the amount offered at the last sale June 28, the least since October.
Direct bidders, investors buying for their own accounts, purchased 6.5 percent of the securities in June, the least since February 2011.
Primary dealers bought 51.5 percent. Indirect bidders, the category of investors that includes foreign central banks, purchased 42 percent.
To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net; Kristine Aquino in Singapore at kaquino1@bloomberg.net
To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net
