BLBG:Treasury Bonds Snap Decline on Bets Fed Measures Will Take Time
Treasury 30-year bonds snapped a four-day decline on speculation yields near a four-month high are attractive given Federal Reserve efforts to spur growth will take time to work.
Benchmark 10-year notes also halted last week’s drop as economists said a central bank report today will show manufacturing in the New York region contracted this month. Treasuries were supported as European governments remained divided on how to overcome the region’s debt crisis, underpinning demand for the safest securities. Treasuries due in 10 years yielded 17 basis points more than similar-maturity German bunds after yielding three basis points less in February.
“Despite the measures by the central banks the U.S. economy is weakening and that maybe a reason why we are not going to see a much further rise in Treasury yields,” said Philip Marey, a senior market economist at Rabobank Groep in Utrecht, the Netherlands. “The economic data will continue to disappoint.”
The 30-year bond yield fell one basis point, or 0.01 percentage point, to 3.08 percent at 7:35 a.m. in New York, according to Bloomberg Bond Trader prices. The 2.75 percent security due in August 2042 rose 9/32, or $2.81 per $1,000 face amount, to 93 22/32. The yield earlier climbed to 3.12 percent, the highest level since May 4.
The 10-year yield was little changed at 1.87 percent after rising 20 basis points last week.
Remain ‘Cautious’
Rabobank’s Marey said he advises clients to remain “cautious” on the economy and bet 10-year Treasury yields will stay at about 1.90 percent for the rest of the year. A Bloomberg survey of economists projects a decline to 1.79 percent, with the most recent projections given the heaviest weightings.
Treasuries handed investors a 0.6 percent loss in the past month through Sept. 14, Bank of America Merrill Lynch indexes show. The MSCI All-Country World Index (MXWD) of shares returned 5.5 percent, including reinvested dividends.
The Fed said last week it would purchase $40 billion of mortgage-backed securities each month in a third round of quantitative easing. The European Central Bank announced plans in the previous week to buy euro-area debt.
Treasury 10-year yields are little changed this year as reports signaled the economic recovery will be slow.
The New York Fed’s index of conditions for manufacturers in the state was minus 2 in September, versus minus 5.85 in August, according to a Bloomberg News survey. Readings below zero signal contraction. U.S. industrial production unexpectedly fell in August, Fed data showed on Sept. 14.
Cyprus Meeting
European Union finance ministers meeting in Cyprus last week were deadlocked over the timetable for a more unified EU banking sector, with a German-led coalition pushing back against a more ambitious plan sought by France, Spain and Italy. The ministers also disagreed over the terms of bailout requests and the role of the ECB, amid concern that failure to resolve divisions may threaten the rally in higher-yielding assets.
“The U.S. Treasury yield, compared to bunds or Asian yields, is attractive,” said Park Sungjin, head of asset management in Seoul at Meritz Securities Co., which oversees the equivalent of $6.1 billion in bonds. “I’m considering buying.”
Gains by U.S. bonds were tempered as investors boost bets that the Fed’s monetary policy will fuel inflation and boost demand for higher-yielding asset such as stocks.
The difference between yields on 10-year notes and same- maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices, widened to the most in six years today. The spread expanded as much as nine basis points to 2.73 percentage points, the most since May 2006
‘Selling Treasuries’
“We are not chasing Treasuries, but we are selling them,” said Trevor Greetham, director of asset allocation at Fidelity Worldwide Investment in London, told Francine Lacqua on Bloomberg’s Television’s “On the Move.” “Ben Bernanke is the only central banker who gets it. What he is doing is expanding the money supply to offset the big threat out there which is the 1930-style debt deflation. It’s a positive move.”
The Fed’s asset purchases are positive for the U.S. credit rating, Moody’s Investors Service said. The central bank is helping reduce borrowing costs for the government, according to the report by Steven Hess, a senior credit officer in New York. Fed policy also seeks to spur economic growth, which may increase federal tax revenue, the report said. Moody’s rates the U.S. Aaa with a negative outlook.
U.S. yields tumbled after the biggest economy was stripped of its AAA credit grade by Standard & Poor’s 13 months ago.
Losing Credibility
About half the time, government bond yields move in the opposite direction suggested by new ratings, according to data compiled by Bloomberg on 314 upgrades, downgrades and outlook changes going back to 1974.
France, for example, is a more creditworthy borrower eight months after S&P said it no longer merits a AAA rating, measures in the bond market show.
“Ratings companies are losing credibility,” Shinji Kunibe, chief portfolio manager for fixed-income investment in Tokyo at Nissay Asset Management Corp., which oversees the equivalent of $66 billion, said on Sept. 12. “Nations like France that are rated AA are regarded as totally safe.”
To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net
To contact the editors responsible for this story: Paul Dobson at pdobson2@bloomberg.net
