BLBG:U.S. Treasuries Decline On Speculation ECB To Buy Bonds
Treasuries fell, extending a decline from last week, on speculation the European Central Bank will purchase euro nations’ bonds to stabilize their economies, damping demand for the safest securities.
Benchmark 10-year yields rose for a fourth day after reaching a record low last week on demand for Treasuries as a haven from slowing economic growth and Europe’s fiscal crisis. The rally was interrupted after ECB President Mario Draghi pledged to support the euro, raising speculation the central bank will announce plans to buy bonds at a meeting on Aug. 2.
“A plan to start buying bonds in Europe will ease the flight to quality, and Treasury yields will rise,” said Hiroki Shimazu, an economist in Tokyo at SMBC Nikko Securities Inc., a unit of Japan’s third-largest publicly traded bank by assets.
Benchmark 10-year yields rose two basis points to 1.57 percent at 9:01 a.m. London time, according to Bloomberg Bond Trader prices. The price of the 1.75 percent security due May 2022 fell 5/32, or $1.56 per $1,000 face amount, to 101 22/32.
The rate increased nine basis points, or 0.09 percentage point, last week. It reached an all-time low of 1.38 percent on July 25.
U.S. employers added 100,000 workers in July, following a gain of 80,000 in June, according to the median forecast of economists surveyed by Bloomberg News before Labor Department figures on Aug. 3. Unemployment held at 8.2 percent, the survey predicts.
Factory Index
The Institute for Supply Management Inc.’s factory index for July rose to 50.2 from 49.7, according to the median estimate in another Bloomberg survey. A reading of 50 is the dividing line between expansion and contraction. The report will be released on Aug. 1.
The Stoxx Europe 600 Index of shares added 0.8 percent and the MSCI Asia Pacific Index (MXAP) climbed 1 percent, gaining for a third day, on speculation European Union policy makers will take action to ease the debt crisis.
Draghi’s comments raised concern he has to produce a plan or face renewed selling in European bond markets, where rising Spanish and Italian yields have fueled bets that the euro bloc will break up.
Fed Purchases
The Federal Reserve 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 U.S. central bank’s plan to lower borrowing costs by swapping short-term Treasuries in its holdings for longer maturities.
The Fed’s policy-setting body starts a two-day meeting tomorrow.
“Sub-par growth and central banks on an easing path still make for a supportive environment for bonds,” Jan Loeys, the New York-based chief market strategist for JPMorgan Chase & Co., wrote in a report on July 27. “We are more wary of U.S. Treasuries, where positions are quite elevated.”
For all the concern over the slowdown in the U.S. economy, the bond market shows there’s less risk of deflation now than before the Fed’s first two rounds of large-scale debt purchases.
The Fed’s favored bond-market gauge of inflation expectations was at 2.39 percent last week, above the 2 percent levels in 2008 and 2010 that led the central bank to inject $2.3 trillion into the economy by buying Treasuries and mortgage- related bonds, a policy known as quantitative easing. The five- year, five-year forward breakeven rate shows how much traders anticipate consumer prices will rise during a period of five years starting in 2017.
The expectation that consumer prices will increase means Fed Chairman Ben S. Bernanke has persuaded traders the U.S. will avoid the deflation that has slowed Japan’s economy since 1995.
U.S. 10-year yields will rise to 1.83 percent by year-end, based on forecasts in a Bloomberg survey of financial companies, with the most recent projections given the heaviest weightings. SMBC Nikko’s Shimazu predicts 2.5 percent.
To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net; David Goodman in London at dgoodman28@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
