BLBG:U.S. Treasuries Decline On Speculation ECB To Buy Bonds
Treasury yields swung between increases and declines amid speculation the European Central Bank will purchase euro-region bonds to reduce their yields and stabilize the debt crisis.
ECB President Mario Draghi meets with Treasury Secretary Timothy F. Geithner in Frankfurt today. The U.S. 10-year yield fell to a record 1.3790 percent on July 25 amid concern that Europe’s fiscal turmoil is harming economic growth, before jumping at the end of last week after policy makers pledged to support the euro. The 10-year rate ended nine basis points, or 0.09 percentage point, higher in the five days.
“It’s very much a continuation of the tone we saw last week,” said Craig Collins, the managing director of rates trading at Bank of Montreal in London. “The main driver is the optimism surrounding the potential buying of peripheral bonds by the ECB. That’s benefiting risk markets.”
Benchmark 10-year yields were at 1.543 percent at 7:53 a.m. New York time, from 1.548 percent last week, according to Bloomberg Bond Trader prices. The rate reached 1.59 percent on July 27, the highest since July 6. The price of the 1.75 percent security due May 2022 was at 101 28/32.
The Stoxx Europe 600 Index of shares added 1.1 percent and the MSCI Asia Pacific Index (MXAP) climbed 1.2 percent, increasing for a third day. Japan’s 10-year rate advanced 3 1/2 basis points to 0.78 percent, the highest since July 12, while Spanish 10-year yields slid 14 basis points to 6.61 percent, falling for the fourth consecutive day.
Draghi’s comments last week raised concern he has to produce a plan or face renewed selling in European bond markets, where rising Spanish and Italian yields have fueled speculation 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.
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.
Yield Forecasts
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.
For investors seeking yield, taxable U.S. municipal bonds offer 10 basis points to 15 basis points more than corporate debt, according to a July 27 report from JPMorgan Chase & Co., one of the 21 primary dealers that trade directly with the Fed.
Bank of America Merrill Lynch’s Broad U.S. Taxable Municipal Securities Index gained 2.5 percent this month, and is up 9.2 percent in 2012.
Bond Returns
Treasuries have returned 0.7 percent this month through July 27, according the Bank of America Merrill Lynch indexes. They have made 2.4 percent in 2012, compared with a 3.3 percent return for German debt and 3.5 percent for U.K. gilts, the indexes show.
The yield difference, or spread, between 10-year Treasuries and similar-maturity German bunds increased one basis point to 16 basis points. That’s the widest since July 23, according to data compiled by Bloomberg, based on closing prices. The yield on the bund declined one basis point to 1.39 percent.
Employers in the U.S. 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 stayed at 8.2 percent, a separate survey predicts.
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.
To contact the reporter on this story: David Goodman in London at dgoodman28@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
