BLBG:Treasuries Decline On Concern Low Yields To Reduce Demand
Treasuries declined for a second day after European Central Bank President Mario Draghi said the ECB was ready to do whatever it takes to preserve the euro, damping demand for the safety of U.S. assets.
Longer maturities led losses on concern a slide in U.S. yields to record lows this week will erode demand as investors prepared to bid at a $29 billion sale of seven-year debt today. Daiwa SB Investments Ltd. and Hontai Life Insurance Co. both say Treasuries have become too expensive. Thirty-year bond yields fell to an all-time low in earlier trading.
Draghi’s comments “are the only real influence on sentiment today,” said John Wraith, a fixed-income strategist at Bank of America Merrill Lynch in London. “His comments were a strong hint they are prepared to act. When we get these big supply events, investors also try to squeeze a bit more yield out of them.”
The benchmark 10-year yield rose four basis points, or 0.04 percentage point, to 1.44 percent at 7:17 a.m. New York time, according to Bloomberg Bond Trader prices. The 1.75 percent note maturing in May 2022 fell 11/32, or $3.44 per $1,000 face amount, to 102 27/32. The yield dropped to a record 1.379 percent yesterday.
The 30-year yield climbed three basis points to 2.49 percent, after declining to 2.4405 percent, the lowest level since Bloomberg started tracking the securities in 1977.
‘Our Mandate’
“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro,” Draghi said during a speech in London today. “‘And believe me, it will be enough.”
His comments came as Spanish policy makers call on the ECB to do more to fight a renewed bout of financial turmoil that pushed the yields on the country’s bonds to the highest level in the euro era this week.
Treasury “yields are too low,” said Kei Katayama, who buys U.S. government debt in Tokyo for Daiwa SB, which manages the equivalent of $63.5 billion. “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, Katayama said.
Hontai Life placed 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.
Global Slowdown
Benchmark 10-year 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.
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.
Growth in U.S. durable goods orders slowed to 0.3 percent in June, from a revised 1.3 percent in May, according to a Bloomberg survey of economists before the Commerce Department report today. The National Association of Realtors will say that sales of previously owned homes rose 0.3 percent in June after increasing 5.9 percent in the previous month, a separate Bloomberg survey showed.
Spread Narrows
The extra yield investors demand to hold 30-year Treasuries instead of 10-year notes shrank to 1.04 percentage points today 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 rates 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 0.95 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
