BLBG:Treasuries Snap Rally as Yields Fall Below Inflation
Treasuries fell, snapping the longest rally in almost four years, as benchmark yields that declined below the U.S. rate of inflation this week cut demand.
U.S. government securities dropped for the first time in nine days, fueled by speculation policy makers around the world are working to curb a slowdown in economic growth. China’s central bank pumped a record amount of money into the financial system this week and Spain prepared a package of budget cuts and economic measures. The U.S. is scheduled to sell $29 billion of seven-year debt today, the last of three note sales this week totaling $99 billion.
“Treasuries have become overvalued,” said Kazuaki Oh’e, a debt salesman in Tokyo at CIBC World Markets Japan Inc., a unit of Canada’s fifth-largest lender. “Yields declined through the inflation rate.”
The benchmark 10-year yield rose two basis points, or 0.02 percentage point, to 1.64 percent at 8:11 a.m. in London, according to Bloomberg Bond Trader prices. The 1.625 percent security due August 2022 fell 7/32, or $2.19 per $1,000 face amount, to 99 29/32. Yields dropped to 1.61 percent yesterday, the least since Sept. 7. They slid below the inflation rate of 1.7 percent on Sept. 25.
Yesterday capped an eight-day rally in prices for 10-year Treasuries, the longest stretch since December 2008, when the U.S. economy deteriorated and credit markets froze.
Adding Funds
China’s central bank added a net 365 billion yuan ($57.9 billion) to the financial system this week, the highest amount in data compiled Bloomberg that go back to 2008.
German bonds were little changed before Spanish Prime Minister Mariano Rajoy issues a spending plan today designed to trim the nation’s budget deficit.
Treasuries rallied yesterday as investors seeking a refuge from Europe’s sovereign-debt crisis bolstered demand for the safest securities. Protesters in Spain and Greece criticizing budget cuts clashed with police this week.
“You could get a little bit of a correction, but the way this Europe business is going, it will put a bid into the market,” said Ali Jalai, who trades U.S. debt in Singapore at Scotiabank, a unit of Bank of Nova Scotia (BNS), one of the 21 primary dealers authorized to deal with the Federal Reserve. “Europe is not looking good. The U.S. is not booming, and it’s not busting. The path is still toward lower rates.”
Swap Rates
Demand for safety is showing up in swap rates and bond yields.
The difference between 10-year interest-rate swaps and similar-maturity Treasury rates widened to as much as 7.5 basis points, the most in two weeks, from negative 0.1 on Sept. 20. The average over the past decade is 36 basis points.
Investors use swaps to exchange fixed and floating interest-rate obligations. The spread between the fixed component and the Treasury rate is a gauge of investor demand for higher-yielding assets. The gap widens when investors demand more yield to compensate for the risk of a swap, a transaction between banks, than they do to lend to the U.S. government.
An index of corporate investment-grade and high-yield securities show the yield widened to 2.51 percentage points over Treasuries from this year’s low of 2.40 percentage point set Sept. 19.
U.S. reports today will show orders for durable goods fell, initial jobless claims declined and pending home sales increased, based on Bloomberg News surveys of economists.
GDP Report
The Commerce Department will say gross domestic product expanded at a 1.7 percent annual rate from April through June, confirming the figure it reported a month ago, according to a separate Bloomberg survey.
Fed Bank of Chicago President Charles Evans said yesterday policy makers must not be passive in the face of high U.S. unemployment, after the central bank announced Sept. 13 plans to spur the economy by buying $40 billion of mortgage securities a month. The jobless rate has been more than 8 percent since February 2009.
The Fed is also swapping shorter-term Treasuries in its holdings with those due in six to 30 years to support the economy by putting downward pressure on borrowing costs. It plans to sell as much as $8 billion of debt maturing from September 2015 to November 2015 today as part of the program, according to the Fed Bank of New York’s website.
The seven-year notes being sold today yielded 1.07 percent in pre-auction trading, versus 1.081 percent at the previous sale of the securities on Aug. 30. Investors bid for 2.80 times the amount offered last month, up from 2.64 times in July.
To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net
