BLBG:Treasuries Snap Gain Before Housing, Factory Reports
Treasuries fell, extending a four- week decline, after Der Spiegel magazine reported the European Central Bank is considering a plan to put a cap on euro-area bond yields to contain the debt crisis.
Ten-year yields approached the highest level in three months before U.S. reports this week that economists said will show home sales and durable goods orders improved last month, sapping demand for the safety of government debt. Investors in Treasuries lost 1.5 percent in August, according to Bank of America Merrill Lynch indexes. The last time they fell as much in a month was December 2010.
Investors are “looking at the possible plan of the ECB to cap yields as being good for crisis resolution, therefore there’s a bit of a movement out of safe havens,” said Andy Cossor, a Hong Kong-based market strategist at DZ Bank AG, Germany’s fourth-largest lender.
The 10-year Treasury yield rose four basis points, or 0.04 percentage point, to 1.85 percent at 6:17 a.m. in New York, according to Bloomberg Bond Trader prices. The 1.625 percent note due in August 2022 fell 10/32, or $3.13 per $1,000 face amount, to 97 31/32.
The benchmark yield climbed to 1.86 percent on Aug. 16, the highest level since May 11.
Yield Limits
The ECB’s governing council may decide at its next meeting in early September to set yield limits on the debt of European countries, Der Spiegel reported yesterday, without saying where it got the information. A plan to set a target on bond yields would involve the ECB using its power to print money, the German news magazine said.
German bonds declined along with Treasuries. The 10-year bund yield climbed eight basis points to 1.57 percent. The euro strengthened 0.1 percent to $1.2347.
Treasuries also fell before U.S. reports this week forecast to show the world’s biggest economy is gaining momentum.
Existing home sales rose 3.3 percent in July from June, when they dropped 5.4 percent, according to a Bloomberg survey before the National Association of Realtors’ report on Aug. 22. Sales of new homes, due the next day from the Commerce Department, rose 4.3 percent in July, a separate survey showed. Orders for durable goods climbed 3 percent, the most this year, a Commerce Department report on Aug. 24 will show, based on another survey.
Higher Yields
“Yields will rise,” said Hiroki Shimazu, an economist at SMBC Nikko Securities Inc. in Tokyo. “The U.S. housing market has started to recover, and it’s natural to think that the manufacturing sector will rebound” because of the demand for construction material and home furnishings.
The odds the Federal Reserve will take steps to support the economy at its Sept. 12-13 meeting are falling, according to Morgan Stanley and Credit Suisse Group AG.
The chance of any Fed action next month have fallen to 30 percent from 40 percent, according to an Aug. 17 report by Matthew Hornbach, head of U.S. interest-rate strategy at Morgan Stanley in New York, one of the 21 primary dealers that trade directly with the U.S. central bank. If policy makers do anything, it will be to extend their outlook for the Fed’s main interest rate to 2015 from 2014, Hornbach wrote.
Asset Purchases
The probability of another large-scale asset-purchase program is 50 percent at most, Neal Soss and Dana Saporta, economists at Credit Suisse, wrote in a report yesterday.
The U.S. central bank bought $2.3 trillion of mortgage and Treasury debt from 2008 to 2011 in two rounds of so-called quantitative easing to cap borrowing costs. It also pledged to hold its target for overnight bank lending close to zero at least through late 2014.
The Fed is now in the process of swapping shorter-term Treasuries in its holdings with those due in six to 30 years to put downward pressure on long-term borrowing costs.
The central bank is scheduled to buy as much as $5 billion of Treasuries due from August 2018 to August 2020 today as part of the program, according to the Fed Bank of New York website.
The gap between U.S. bank deposits and loans is growing at the fastest pace in two years, providing lenders with funds to buy bonds.
As deposits increased 3.3 percent to $8.88 trillion in the two months ended July 31, business lending rose 0.7 percent to $7.11 trillion, Fed data show. The record gap of $1.77 trillion has expanded 15 percent since May, the biggest similar-period gain since July, 2010.
Banks already bought $136.4 billion in Treasury and government agency debt this year, more than double the $62.6 billion in all of 2011, pushing their holdings to an all-time high of $1.84 trillion.
Faced with unemployment above 8 percent and regulations forcing them to hold more and higher-quality assets, banks are lending at below pre-recession levels.
“Bank deposits continue to explode and in turn they continue to buy Treasuries,” said Michael Mata, a money manager in Atlanta at ING Investment Management Americas, which oversees about $160 billion.
To contact the reporters on this story: Lucy Meakin in London at lmeakin1@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
