BLBG:Treasuries Advance on Outlook for Manufacturing Slowdown
Treasuries rose, extending gains from last week, on speculation an industry report will show U.S. manufacturing shrank in September after data today signaled a slowdown at factories in China, Japan, and Australia.
Yields have been falling as the so-called fiscal cliff of tax and spending cuts scheduled for 2013 threatens U.S. growth, Bank of America Corp. said in a report. Europe’s debt crisis is also bolstering demand for refuge assets. The rally has pushed yields, which move opposite to prices, to within a quarter percentage point of the record low.
“Treasuries are still a safe haven,” said Kei Katayama, who buys U.S. government debt in Tokyo for Daiwa SB Investments Ltd., which manages the equivalent of $63.8 billion. “Some economic figures are signaling weakness.”
The benchmark 10-year rate slid two basis points to 1.62 percent at 6:45 a.m. in London, based on Bloomberg Bond Trader data. The price of the 1.625 percent security due in August 2022 rose 5/32, or $1.56 per $1,000 face amount, to 100 3/32. Ten- year yields declined 12 basis points last week. The all-time low was 1.38 percent set July 25.
Economist forecasts suggest the Treasury rally may be coming to an end. Ten-year rates will increase to 1.78 percent by year-end, based on a Bloomberg survey of financial companies, with the most recent projections given the heaviest weightings. Katayama predicts at least 2 percent.
The yield on Japan’s 2022 bond declined 1/2 basis point to 0.76 percent, falling for a sixth day. A basis point is 0.01 percentage point.
ISM Report
The Institute for Supply Management Inc.’s factory index in the U.S. was probably 49.8, compared with 49.6 in August, according to the median estimate in a Bloomberg News survey of economists taken before the group’s report today. A reading of 50 is the dividing line between expansion and contraction for the report, which is scheduled for 10 a.m. New York time.
Japan’s Tankan index for large manufacturers fell in the third quarter, the Bank of Japan (8301) said today in Tokyo, showing the nation’s big Japanese manufacturers became more pessimistic.
In Australia, manufacturing shrank at a faster pace in September, a private gauge showed. A government survey indicated China’s manufacturing contracted for a second month.
Treasuries returned 1.1 percent in the last two weeks of September, leaving them down 0.3 percent for the month, according to Bank of America Merrill Lynch indexes.
Fiscal Cliff
“The market may be beginning to price in fiscal cliff risks,” Priya Misra, head of U.S. rates strategy for the bank in New York, wrote in a report Sept. 28. Ten-year yields will be 1.75 percent by Dec. 31, the report said. Bank of America’s Merrill Lynch unit is one of the 21 primary dealers that trade directly with the Federal Reserve.
In Europe, government efforts to cut spending led to protests in Greece and Spain last month. A Portuguese labor group said it plans to consider calling a strike as it protests government austerity policies.
“Manufacturing is sluggish around the world,” said Hiroki Shimazu, an economist in Tokyo at SMBC Nikko Securities Inc., a unit of Japan’s third-largest publicly traded bank by assets. “Yields have fallen because of the fiscal cliff and the European sovereign-debt problem.”
The Fed announced Sept. 13 that it will buy $40 billion of mortgage-backed securities a month to support the economy by putting downward pressure on borrowing costs.
Chairman Ben S. Bernanke is scheduled to speak at 12:30 p.m. New York time today on monetary policy.
Inflation Outlook
Investors initially increased their inflation expectations on the Fed’s plan to buy mortgage bonds. The gap between yields on 10-year notes and same-maturity Treasury Inflation-Protected Securities, or TIPS, widened to 2.73 percentage points on Sept. 17, the highest level since May 2006. The so-called break-even rate, which measures how much traders anticipate consumer prices will rise over the life of the debt, narrowed last week to 2.42 percentage points.
Demand to protect against higher long-term bond yields over the next six months has been static since the announcement, Barclays Plc data show.
The figures measure what traders call the payer skew using options on interest-rate swaps. The skew typically widens when traders anticipate a rise in yields as they seek to hedge the value of their holdings.
It’s now 25 cents for the shorter term, about unchanged from December, while it’s 89 cents for options that mature in 2015, up from 80 cents at the end of 2011. Each 10 cents represents $100,000 of bonds.
“The market is not suggesting there’s any kind of runaway inflation in the next one or two years given the below trend growth trajectory and the impending fiscal cliff,” said Gemma Wright-Casparius, who manages the $43.9 billion Vanguard Inflation-Protected Securities Fund at Valley Forge, Pennsylvania-based Vanguard Group Inc.
To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net
To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net
