BLBG:Treasuries Fall, Snapping 2-Day Gain, On ECB Speculation
Treasuries fell, snapping a two-day advance, as speculation that the European Central Bank will announce measures as early as this week to stem the euro region’s debt crisis curbed demand for the safest assets.
ECB President Mario Draghi told officials yesterday he would be comfortable buying three-year government bonds to bring down borrowing costs for nations in financial distress, according to Jean-Paul Gauzes, a member of the European Parliament. Treasury 10-year yields earlier touched one-month lows before U.S. data economists said will show manufacturing is struggling to grow, fanning speculation the Federal Reserve will expand bond purchases to support economic growth.
“The euro region has a chronic disease, but the medicine has been already prescribed,” said Hideki Shibata, a senior strategist for rates and foreign exchange at Tokai Tokyo Research Center Co. Steps toward a resolution of Europe’s financial turmoil “will be a positive for the U.S. economy, leading to a positive gain in Treasury yields.”
The benchmark 10-year yield added four basis points, 0.04 percentage point, to 1.59 percent as of 8:35 a.m. in London. The 1.625 percent security maturing in August 2022 fell 13/32, or $4.06 per $1,000 face amount, to 100 10/32, according to Bloomberg Bond Trader prices. The rate earlier declined to 1.54 percent, the lowest level since Aug. 6.
Five-year yields rose three basis points to 0.63 percent. U.S. markets were shut yesterday for the Labor Day holiday.
Treasuries underperformed German bunds today, with the 10- year yield difference, or spread, widening one basis point to 18 basis points. That compared with an average of six basis points over the past five years.
Higher Yields
Treasury 10-year rates may climb toward 2 percent by year- end, said Tokai Tokyo’s Shibata, which would be the highest since April 25. Should his forecast prove accurate, investors who buy the securities today would incur a loss of 3.2 percent, according to data compiled by Bloomberg.
Draghi told lawmakers yesterday that purchasing short-dated bonds doesn’t constitute state financing, Gauzes said.
“He said for example three years is OK, 15 years no,” Gauzes told reporters after a closed-door parliamentary session in Brussels.
The ECB is scheduled to hold a policy meeting on Sept. 6. European Union President Herman Van Rompuy is traveling to Berlin for talks with German Chancellor Angela Merkel today as Italian Prime Minister Mario Monti welcomes French President Francois Hollande to Rome.
Factory Index
U.S. government bonds have returned 2.6 percent this year, Bank of America Merrill Lynch index data show. That compares with a 13.5 percent gain in the Standard & Poor’s 500 Index, including reinvested dividends.
The Institute for Supply Management Inc.’s U.S. factory index for last month is estimated at 50, the dividing line between growth and contraction and compared with 49.8 in July, according to a Bloomberg News survey of economists. The report is due today.
Speaking on Aug. 31 in Jackson Hole, Wyoming, Fed Chairman Ben S. Bernanke said the costs of “nontraditional policies” appear manageable when considered carefully. That implies Fed policy makers “should not rule out the further use of such policies if economic conditions warrant,” he said.
“Treasury yields will decline.” said Hiromasa Nakamura, who invests in U.S. debt from Tokyo at Mizuho Asset Management Co., which oversees the equivalent of $41 billion. “The U.S. economy is very fragile.”
The policy-setting Federal Open Market Committee will next meet on Sept. 12-13.
Inflation Outlook
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 $2 billion of Treasuries due from February 2036 to August 2042 and $5 billion of securities maturing in September 2018 to August 2020 today as part of the program, according to the Fed Bank of New York website.
A measure of price-increase predictions used by the Fed to set policy, the five-year, five-year forward break-even rate, has averaged 2.54 percent this year. That’s the lowest since 2001 for the measure, which gauges expectations for inflation between 2017 and 2022. Economists surveyed by Bloomberg forecast 10-year government bonds will yield 1.76 percent by Dec. 31.
The consumer-price index was unchanged in July and June from a month earlier. It fell 0.3 percent in May, the most since December 2008, according to the Labor department.
“The bond market doesn’t view inflation as a problem,” Anthony Valeri, a market strategist in San Diego at LPL Financial, which oversees $350 billion of assets, said Aug. 28 in a telephone interview. “The bond market still views deflation as a greater risk to the economy for the next one to maybe two years.”
To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Masaki Kondo in Singapore at mkondo3@bloomberg.net
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net
