BLBG:Treasuries Snap Loss On Greece; El-Erian Favors Safety
Treasuries ended a three-day loss after Standard & Poor’s cut its outlook on Greece’s debt rating to negative, spurring demand for U.S. securities as a refuge from Europe’s fiscal crisis.
Mohamed El-Erian at Pacific Investment Management Co., home to the world’s biggest bond fund, said investors who took advantage of a rally in riskier markets should cut holdings in favor of safer assets. The Treasury Department will sell $24 billion of 10-year notes today and $16 billion of 30-year bonds tomorrow. It auctioned $32 billion of three-year debt yesterday.
Benchmark 10-year yields were little changed at 1.62 percent as of 7 a.m. in London, according to Bloomberg Bond Trader prices. The price of the 1.75 percent security due in May 2022 was 101 7/32. Yields have climbed from the record low of 1.38 percent set July 25.
“This is a good time to buy” following the increase in rates, said Hajime Nagata, who helps oversee the equivalent of $131.1 billion as an investor in Tokyo at Diam Co., a unit of Dai-Ichi Life Insurance Co., Japan’s second-biggest life insurer. “The problem isn’t solved in Europe. The U.S. economy is not doing well.”
Today’s rate is eight basis points, or 0.08 percentage point, less than the 1.7 percent pace of inflation as measured by consumer prices. If it rises to match cost increases in the economy, it would be the first time the 10-year note pays a positive so-called real yield in 14 months. Nagata said he may add to his Treasury holdings after the rate climbed past 1.6 percent yesterday.
Greek Outlook
S&P cut its outlook on Greece’s debt to negative from stable, which means it is more inclined to reduce its ranking for the nation. The government may fail to make the budget cuts required to receive its next aid payment from the European Union and the International Monetary Fund, the ratings company said yesterday in a statement. Greece is ranked CCC by S&P, or eight levels below investment grade.
“This is an unusually uncertain time,” said El-Erian, the chief executive officer for Pimco, which is based in Newport Beach, California. “It’s not just Europe. Let’s not forget there is a fiscal cliff in the U.S. Let’s not forget geopolitics is heating up in Iran again,” he said yesterday on Bloomberg Radio’s “Hays Advantage” with Kathleen Hays.
The record-size $263 billion Total Return Fund had 52 percent of its assets in mortgage-related debt, 35 percent in Treasuries and 13 percent in investment-grade corporates as of June 30, according to Pimco’s website.
‘Fiscal Cliff’
Italian Prime Minister Mario Monti said divisions in the 17-nation currency bloc threaten the European Union’s future, according to an interview with Germany’s Der Spiegel magazine published Aug. 5.
In the U.S., the year-end “fiscal cliff” of higher taxes and spending cuts clouds the economic outlook, El-Erian said. The nation added more jobs in July than economists expected, though the unemployment rate rose to 8.3 percent from 8.2 percent, a Labor Department report showed Aug. 3.
Iran is operating under sanctions from the U.S. and the EU, levied to discourage what they say is the Persian Gulf country’s pursuit of a nuclear bomb.
The U.S. central bank is scheduled to buy as much as $2 billion of Treasuries due from February 2036 to May 2042 today as part of its efforts to support the world’s biggest economy, according to the Fed Bank of New York website.
The bank is swapping shorter-term Treasuries in its holdings with those due in 6 to 30 years to put downward pressure on long-term borrowing costs.
Note Auction
Treasuries have returned 2 percent this year as of yesterday, according to Bank of America Merrill Lynch indexes.
The MSCI All-Country World Index of stocks handed investors a 9.7 percent in the period, according to data compiled by Bloomberg, supported by interest-rate cuts in Europe and China.
Treasuries fell yesterday as the Standard & Poor’s 500 Index climbed to the highest level in three months.
Investors should set “small shorts,” or bets against Treasuries, as the 10-year yield rises toward 1.67 percent, David Keeble, the New York-based head of fixed-income strategy at Credit Agricole Corporate & Investment Bank, wrote in a report yesterday. Investors should increase the position if yields rise past that level, according to the company, which is part of Credit Agricole Group overseeing France’s third-biggest bank by market value.
The 10-year securities scheduled for sale today yielded 1.655 percent in pre-auction trading, compared with the record low of 1.459 percent set at the prior auction on July 11.
Investors bid for 3.61 times the amount of debt offered last month, the second-highest level according to data compiled by Bloomberg that go back to 1993.
Direct bidders buying for their own accounts purchased a record 45.4 percent of the notes, based on data back to 2003. Indirect bidders, the investor group that includes foreign central banks, bought 40.6 percent of the debt, versus the 10- sale average of 41.4.
To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net
To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net
