BLBG:Treasuries Decline On Concern Low Yields To Reduce Demand
Treasuries fell for a second day on concern a slide in yields to record lows this week 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 to negative 1.02 percent on July 24, the most expensive level on record. It was minus 0.98 today. A negative reading indicates investors are willing to accept yields below what’s considered fair value.
“When we get these big supply events, investors try to squeeze bit more yield out of them,” said John Wraith, a fixed- income strategist at Bank of America Merrill Lynch in London. “It’s a bit of ebb and flow at the moment between safe havens and riskier assets. Treasuries prices fell yesterday and we’ve held that today.”
The benchmark 10-year yield rose two basis points, or 0.02 percentage point, to 1.42 percent at 9:03 a.m. London time, according to Bloomberg Bond Trader prices. The yield dropped to an all-time low of 1.379 percent yesterday. The 1.75 percent note due in May 2022 fell 5/32, or $1.56 per $1,000 face amount, to 103 1/32.
‘Too Low’
“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.
Daiwa SB favors shorter maturities, those that will fall least if yields rise, Tokyo-based Katayama said.
Hontai Life made a bet against Treasuries this week, said Kevin Yang, head of bond investment for the company in Taipei. Hontai Life has $6 billion in assets.
The Treasury is scheduled to sell $29 billion of seven-year debt today, after it auctioned $35 billion of five-year notes yesterday and the same amount of two-year securities on July 24.
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 slowed to an annual rate of 350,000 in June, from a revised 382,000 the previous month, according to a report yesterday. Economists had forecast a rate of 372,000.
Durable Goods
The Commerce Department will say today that orders for durable goods, those meant to last at least three years, climbed 0.3 percent in June, according to a Bloomberg survey. The figure compares with a 1.3 percent advance in May. The National Association of Realtors will say today that sales of previously owned homes rose 0.3 percent in June after climbing 5.9 percent in the previous month, a separate survey showed.
Yields on Spain’s two-, five-, 10- and 30-year bonds 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.
Narrowing 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 central 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 interest rats in a range between zero and 0.25 percent since December 2008.
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 0.94 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 previous sale on June 28, the least since October.
To contact the reporters on this story: David Goodman in London at dgoodman28@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
