BLBG:Treasuries Trim August Loss On Fed Stimulus Speculation
Treasuries pared a monthly loss this week amid speculation the Federal Reserve will increase efforts to push yields down to spur the economy.
Fed Chairman Ben S. Bernanke is scheduled to speak on economic policy today. U.S. government securities handed investors a 0.4 percent loss in August, Bank of America Merrill Lynch data show. The decline was as steep as 1.6 percent on Aug. 16. While housing is showing signs of improvement, the central bank said additional stimulus will probably be needed unless the economy shows signs of a durable pickup.
“We bought Treasury futures this week,” said Hiromasa Nakamura, who invests in U.S. debt from Tokyo at Mizuho Asset Management Co., which oversees the equivalent of $41.9 billion and is part of Japan’s third-biggest bank. “I can see some improvement in the housing sector, but the employment situation is still not so good.”
Benchmark 10-year yields were little changed at 1.63 percent at 6:47 a.m. in London, according to Bloomberg Bond Trader data. The price of the 1.625 percent security due August 2022 was 100. The rate compares with the record low yield of 1.38 percent set July 25 and the average of 3.73 percent for the past decade.
Ten-year futures contracts for September delivery rose to 134 6/32 from 133 18/32 a week ago.
The rate on Japan’s benchmark 2022 bond slid 1/2 basis point to 0.80 percent today. A basis point is 0.01 percentage point. The nation’s government bond market fell 0.2 percent this month, Bank of America figures show.
Home Data
Purchases of new and existing houses in the U.S. rose in July, and pending home sales gained, reports this month showed. The U.S. added 163,000 jobs, the Labor Department said Aug. 3, more than the 100,000 projected by economists surveyed by Bloomberg News. The same report said the jobless rate climbed to 8.3 percent from 8.2 percent.
Factory orders probably rose 2 percent in July from June, which would be the biggest gain this year, according to a Bloomberg survey of economists before the Commerce Department reports the figure today.
The Institute of Supply Management Chicago’s business activity index was 53.2 in August, versus 53.7 last month, a separate survey showed before today’s data.
The Thomson Reuters/University of Michigan August index of consumer sentiment probably held at the level of 73.6 that the group reported two weeks ago, rising from 72.3 in July, based on responses from economists before the report today.
Bernanke is scheduled to address the Kansas City Fed’s annual economic-policy conference in Jackson Hole, Wyoming.
Probably Needed
Many policy makers at the Federal Open Market Committee’s last meeting said additional stimulus probably will be needed soon unless the economy showed a “substantial and sustainable strengthening,” according to minutes of their July 31-Aug. 1 meeting.
The chairman may repeat portions of the Fed’s latest statements, according to former central bank official Vincent Reinhart, the chief U.S. economist at Morgan Stanley, one of the 21 primary dealers that trade directly with the Fed.
“He has to convey that the Fed has been disappointed in the economy’s performance, that policy makers are inclined to provide additional accommodation soon unless there is a significant and sustained improvement, and that they will closely monitor the situation,” Reinhart wrote in a report yesterday. “We have had low expectations for significant news.”
Rate Pledge
Bernanke has pledged to keep the target for U.S. overnight bank lending at almost zero through at least late 2014. The central bank has also purchased $2.3 trillion of Treasury and mortgage-related debt to cap interest rates. The Fed’s next meeting is Sept. 12-13.
Benchmark borrowing costs that dropped to a record in July are spurring demand for steeper interest rates, fueling a rally in high-yield debt. The securities are rated below Baa3 by Moody’s Investors Service and less than BBB- at Standard & Poor’s.
An index of the bonds returned 1.2 percent this month. It is up 10 percent this year, versus 2.3 percent for Treasuries, based on the Bank of America data. Investors can earn 5.86 percentage points more by buying high-yield bonds in the index than government securities, narrowing from 7.23 percentage points at the end of 2011.
High-yield bonds globally are “compelling,” Betsy Hofman, a portfolio manager at Franklin Templeton in San Mateo, California, wrote in a report that the company distributed by e- mail yesterday.
‘Attractive Option’
“The benign outlook for defaults and the healthy U.S. corporate environment have continued to make the high-yield sector an attractive option for investors, particularly in relation to the government bonds of many developed countries,” according to the company, which oversees $718.7 billion.
Treasuries are becoming more expensive, based on the 10- year term premium, a model created by economists at the Fed that includes expectations for interest rates, growth and inflation. The gauge fell to a four-week low of negative 0.89 percent. A negative reading indicates investors are willing to accept yields below what’s considered fair value.
To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.
To contact the editor responsible for this story: Garfield Reynolds at greynolds1@bloomberg.net
