BLBG:Treasuries Snap Gain Before Home-Sales Data, Auction
Treasuries snapped a two-day gain before an industry report that economists said will show pending home sales rose last month, as investors prepared to bid at the second of three note auctions this week.
Ten-year yields were 26 basis points from the record low, leading JPMorgan Private Bank to look for higher rates outside the government debt market, said Meg McClellan, the U.S. head of fixed income for the company in New York. Treasuries have handed investors a 0.5 percent loss this month, and they are up 2.2 percent this year, according to Bank of America Merrill Lynch indexes. High-yield bonds in the U.S. returned 1.1 percent in August, extending their 2012 gain to 10 percent, the data show.
“The economy is improving slightly,” said Kazuaki Oh’e, a debt salesman in Tokyo at CIBC World Markets Japan Inc., a unit of Canada’s fifth-largest lender. “I wouldn’t want to buy” Treasuries, he said.
Benchmark 10-year yields were little changed at 1.64 percent as of 6:52 a.m. in London, according to Bloomberg Bond Trader data. The price of the 1.625 percent security due in August 2022 was 99 7/8. The rate compares with the record low of 1.38 percent set July 25 and the average of 3.73 percent for the past decade.
Japan’s 10-year yield slid 1/2 basis point to 0.80 percent today. It has declined from this month’s high of 0.86 percent set Aug. 16. A basis points is 0.01 percentage point.
Home Sales
U.S. pending home sales rose 1 percent in July from June, rebounding from a 1.4 percent decline, based on a Bloomberg News survey of economists before the National Association of Realtors issues the figure today. The U.S. economy grew at a 1.7 percent pace in second quarter, more than the 1.5 percent rate the government estimated a month ago, a separate report today will show, based on the surveys.
The U.S. is scheduled to auction $35 billion of five-year debt today and $29 billion of seven-year securities tomorrow. It sold $35 billion of two-year notes yesterday.
The last five-year sale on July 25 drew bids for 2.71 times the amount of debt offered. The average has been 2.92 times for the last 10 of the monthly sales.
“Given the very low level of interest rates, we have been very underweight core fixed income,” which includes government, municipal and investment-grade corporate bonds, McClellan said.
Residential mortgage-backed securities may rise as the U.S. housing market recovers, she said yesterday on Bloomberg Television’s “Market Makers” with Stephanie Ruhle and Erik Schatzker. Floating-rate debt is cheap now, said McClellan, who helps oversee more than $140 billion for the company.
High Yield
Investor demand for high-yield bonds may reduce the extra yield the securities offer over Treasuries by 50 basis points to 75 basis points, she said. The difference has narrowed to 5.88 percentage points from this year’s high of 7.23 percentage points in June, based on the Bank of America data.
High-yield bonds are those rated below Baa3 by Moody’s Investors Service and less than BBB- at Standard & Poor’s.
Treasuries rose yesterday on speculation the Federal Reserve is planning to announce a new plan to buy bonds, known as QE3 because it would be the central bank’s third purchases under its quantitative easing policy. Officials uses this method to support the economy by curbing borrowing costs.
“The markets want the Fed to do QE3,” said Masaru Hamasaki, chief strategist in Tokyo at Toyota Asset Management Co., which oversees the equivalent of $24 billion and is a unit of the world’s biggest automaker. “That’s pushing yields lower.”
Jackson Hole
Fed Chairman Ben S. Bernanke is scheduled to speak at the end of this week at the Kansas City Fed’s annual economic symposium in Jackson Hole, Wyoming. Minutes of the July 31-Aug. 1 meeting of the Federal Open Market Committee, released last week, showed many policy makers said additional stimulus probably will be needed soon unless the economy shows signs of a durable pickup. The Fed’s next meeting is Sept. 12-13.
The central bank is also swapping shorter-term Treasuries in its holdings with those due in six to 30 years to put downward pressure on long-term interest rates. It is scheduled to buy as much as $5 billion of Treasuries due from August 2018 to August 2020 today as part of the plan, according to the Fed Bank of New York’s website.
Treasuries were the most expensive in three weeks yesterday, based on the term premium, a model created by economists at the Fed that includes expectations for interest rates, growth and inflation. The gauge slid to negative 0.88 percent, the costliest since Aug. 6. It was little changed today.
A negative reading indicates investors are willing to accept yields below what’s considered fair value. The average over the past decade is positive 0.46 percent.
To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net; Monami Yui in Tokyo at myui1@bloomberg.net.
To contact the editor responsible for this story: Garfield Reynolds at greynolds1@bloomberg.net
