BLBG:Treasuries Hold Gain Before Report on Durable Goods
Treasuries rose for a sixth day as economists said reports on durable goods orders and consumer spending this week will show the economy is slowing, while the so-called fiscal cliff threatens the expansion.
Ten-year notes extended their daily rally to the longest since May 2011 on renewed discord among European leaders over ways to bring an end to the region’s debt crisis. U.S. investors are buying Treasuries at a faster pace than foreigners for the first time since 2010, government figures show. The fiscal cliff, $600 billion of tax and spending cuts scheduled for 2013, is threatening growth and maintaining demand for the safety of U.S. government securities.
“Economic reports have been a mixed batch, but overall they are consistent with continued sub-par growth and low yields in the U.S.,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh. “Treasuries are also driven by events in Europe amid renewed concern about the crisis.”
The benchmark 10-year yield dropped three basis points, or 0.03 percentage point, to 1.72 percent at 6:58 a.m. in New York, according to Bloomberg Bond Trader prices. The 1.625 percent note due in August 2022 rose 9/32, or $2.81 per $1,000 face amount, to 99 1/8. The six-day rally is the longest since the period ending May 6, 2011.
Durable goods orders, a measure of demand for equipment and machinery, dropped 5 percent in August after rising 4.1 percent the previous month, according to a Bloomberg News survey before the Sept. 27 report from the Commerce Department. Household purchases gained 0.5 percent last month after a 0.4 percent increase in July, a separate survey showed before the figures are released on Sept. 28.
Europe Concern
Treasuries were also supported after German Chancellor Angela Merkel and French President Francois Hollande clashed over the weekend on a timetable to introduce joint oversight of the region’s banking sector, with Merkel rebuffing Hollande’s appeal to activate it “the earlier, the better.”
Germany’s Ifo institute said its business climate index, based on a survey of 7,000 executives, dropped to 101.4 from 102.3 in August. That’s the lowest reading since February 2010.
U.S. government securities held by domestic buyers, excluding the Federal Reserve, rose 10.7 percent in the first seven months of this year to $3.61 trillion, compared with a 6.9 percent increase for countries from China to Germany, according to the latest data available from the Treasury Department and compiled by Bloomberg.
Foreign purchases grew 13 percent last year, while U.S. holdings fell 4.6 percent.
Debt Auctions
The Treasury is scheduled to sell $35 billion of two-year notes tomorrow, the same amount of five-year debt the next day and $29 billion of seven-year securities Sept. 27.
Treasuries returned 1.7 percent this year as of Sept. 21, versus 13 percent for high-yield bonds, according to Bank of America Merrill Lynch indexes. The MSCI All-Country World Index (MXWD) of shares handed investors a 15 percent gain including reinvested dividends, according to data compiled by Bloomberg.
An index of U.S. high-yield company debt pays 2.42 percentage points more than Treasuries, according to Bank of America Merrill Lynch. Investor demand for the corporate securities has narrowed the difference from 3.48 percentage points at the end of last year.
U.S. government debt has underperformed German bonds on risk-adjusted basis this year. Treasuries have gained 0.4 percent this year compared with a 0.5 percent gain for the European counterparts after volatility is taken into account. Risk-adjusted return are calculated by dividing total return by daily price swings.
Fed Purchases
The Fed said on Sept. 13 it will buy $40 billion of mortgage-backed bonds a month to put downward pressure on borrowing costs.
The decision has helped drive down the cost of buying a home. The average rate on a 30-year fixed mortgage matched a record low 3.49 percent in the week ended Sept. 20, according to McLean, Virginia-based Freddie Mac.
U.S. policy makers pledged to keep their target for overnight loans between banks close to zero until at least the middle of 2015.
The central bank is also swapping shorter-term Treasuries in its holdings with those due in six to 30 years. It plans to buy as much as $2 billion of debt maturing from February 2036 to August 2042 today as part of the program, according to Fed Bank of New York’s website.
“People are waiting to see if the economy is picking up,” said Tomohisa Fujiki, an interest-rate strategist in Tokyo at BNP Paribas SA, whose New York unit is one of the 21 primary dealers obliged to bid at U.S. debt sales. “They want to confirm the numbers before selling Treasuries.”
Ten-year yields will increase to 1.80 percent by Dec. 31, according to the average forecast in a Bloomberg survey of financial companies.
To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net; Anchalee Worrachate in London at aworrachate@bloomberg.net
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net
