BLBG:Treasuries Rise on Signs of Slowing Expansion in China
Treasuries rose the most in a week on signs of slowing economic growth in China and Japan, following a smaller U.S. jobs gain than analysts expected.
The employment report increased speculation the Federal Reserve will boost its bond purchases as soon as this week as it strives to support the world’s biggest economy with a policy known as quantitative easing. Money market yields show traders expect the U.S. central bank to hold its benchmark interest rates close to zero percent until the middle of 2015.
“Worldwide, the economic data are bad, not just the U.S.,” said Hajime Nagata, who helps oversee the equivalent of $131.8 billion as an investor in Tokyo at Diam Co., a unit of Dai-ichi Life Insurance Co., Japan’s second-biggest life insurer. “There is a higher probability of QE.” Diam holds Treasuries in a bet they will gain, Nagata said.
Ten-year yields declined three basis points, or 0.03 percentage point, to 1.64 percent as of 6:13 a.m. in London, according to Bloomberg Bond Trader data. The price of the 1.625 percent security due in August 2022 rose 1/4, or $2.50 per $1,000 face amount, to 99 27/32.
China’s industrial output rose 8.9 percent in August from 12 months earlier, the slowest pace in three years, data from the National Bureau of Statistics showed yesterday. Imports and exports fell short of economist estimates, data today showed.
Japan’s gross domestic product expanded at an annualized 0.7 percent rate in the second quarter, half the pace the government initially estimated, according to a report today.
Ten-year yields climbed three basis points to 3.42 percent in China and fell 1 1/2 basis points in Japan to 0.80 percent.
Jobs Data
U.S. payrolls rose by 96,000 in August, the Labor Department said Sept. 7, below the 130,000 median estimate of economists in a Bloomberg News survey.
Treasuries have lagged behind stocks this year even as growth slowed.
Investors in U.S. government securities earned 2.1 percent as of Sept. 7, according to Bank of America Merrill Lynch indexes. The MSCI All-Country World Index (MXWD) of stocks returned almost 13 percent including reinvested dividends.
Yields show investor inflation expectations increased to a five-month high on speculation Fed efforts to spur the U.S. economy will also send costs higher.
The difference between rates on 10-year notes and same- maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, widened to 2.38 percentage points, the most since April 3. The average over the past decade is 2.16 percentage points.
Inflation Expectations
The spread between 10- and 30-year yields widened to 1.17 percentage points, the most since May. Thirty-year bonds, because of their long maturity, are more sensitive to inflation than shorter-term Treasuries.
“Most investors already priced their prediction the Fed will start QE3 in this year,” said Hiroki Shimazu, an economist at SMBC Nikko Securities Inc. in Tokyo, a unit of Japan’s third- largest publicly traded bank by assets. “It’s bringing inflation expectations to U.S. Treasuries.”
The Fed has already purchased $2.3 trillion of Treasury and mortgage-related debt to cap interest rates. The central bank is currently in the process of swapping shorter-term Treasuries in its holdings with those due in 6 to 30 years to put downward pressure on long-term borrowing costs.
It is scheduled to buy as much as $1.5 billion of TIPS due from January 2019 to February 2042 today as part of the program, according to the Fed Bank of New York website.
OIS, Volatility
The central bank’s next meeting is Sept. 12-13, just as the government holds three debt auctions. The U.S. plans to sell $32 billion of three-year notes tomorrow, $21 billion of 10-year debt the next day and $13 billion of 30-year bonds on Sept. 13.
Six months ago, money market traders expected the Fed to raise interest rates by the end of 2013. Now, they see borrowing costs staying at record lows for about three more years as the economic outlook worsens.
Bond market measures from overnight index swaps, which indicate no rise in the federal funds rate until mid-2015, to a 62 percent decline in a measure of volatility in government bonds signal that rates will stay near zero for longer. The gap between two- and five-year Treasury yields, which decreases when traders expect benchmark rates to remain subdued, is more than 50 percent narrower than its average since 2008.
“The problems have been bigger than anticipated and it will take a while to work our way through these issues,” Larry Dyer, a U.S. interest-rate strategist in New York with HSBC Holdings Plc’s securities unit, said in an interview on Sept. 6. “The bond market is pricing in pretty close to a very prolonged period of low growth,” said Dyer, whose firm is one of the 21 primary dealers that trade with the central bank.
To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net; Sharon Chen in Singapore at schen462@bloomberg.net.
To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.
