BLBG:Treasuries Snap Rally Following $66 Billion of Debt Sales
Treasuries fell, led by longer-dated securities, as investors bet this week gains aren’t justified given signs the economy is improving and as progress in resolving Europe’s debt crisis saps demand for safety.
Thirty-year bonds pared their third weekly gain out of four amid bets that $66 billion of securities sold this week satisfied appetite for the U.S. government’s debt. Demand slipped at an auction of 30-year debt yesterday. Finance chiefs meeting in Tokyo acknowledged that Europe has made “significant progress” in overcoming the crisis of confidence in the euro, German Finance Minister Wolfgang Schaeuble said.
“The path of least resistance is for yields to test higher, but it’s not an aggressive test higher,” said Padhraic Garvey, head of developed market debt at ING Bank NV in Amsterdam. “There isn’t any big risk-off story doing the rounds. It’s all pretty static on that front.”
Thirty-year bond yields rose two basis points, or 0.02 percentage point, to 2.87 percent at 7:11 a.m. New York time, still set for a 10-basis point decline since Oct. 5, based on Bloomberg Bond Trader data. The 2.75 percent security due August 2042 slipped 14/32 or $4.38 per $1,000 face amount, to 97 18/32.
Ten-year note yields also gained two basis points, to 1.70 percent, leaving them five basis points lower since Oct. 5. The rate reached a record-low 1.38 percent on July 25.
Positive Sentiment
Schaeuble said “this time there is a much more positive underlying sentiment” compared with earlier meetings. He was speaking at a briefing with Bundesbank President Jens Weidmann at the annual International Monetary Fund and World Bank meetings in Tokyo.
The 10-year term premium, a model created by economists at the Federal Reserve that includes expectations for interest rates, growth and inflation, was negative 0.89 percent. A negative reading indicates investors are willing to accept yields below what’s considered fair value. The average for the past 10 years is 0.44 percent. The all-time low was negative 1.02 percent on July 24.
Tomoya Masanao, the head of portfolio management for Japan at Pacific Investment Management Co., which runs the world’s biggest bond fund, said investors should avoid 30-year bonds with yields less than 3 percent. Masanao spoke on Oct. 10 at a conference in Tokyo.
There are some signs of improvement in the U.S. economy, as President Barack Obama and challenger Mitt Romney prepare to face off in the Nov. 6 general election.
Labor Data
The U.S. unemployment rate slid to 7.8 percent in September from 8.1 percent the month before, the Labor Department reported on Oct. 5. Initial claims for jobless insurance fell last week, a government report showed yesterday.
Data today will show producer prices rose 0.8 percent in September from the month before, according to a Bloomberg News survey of 76 economists before the Labor Department report, due at 8:30 a.m. New York time today. The increase was 1.7 percent in August.
The Thomson Reuters/University of Michigan index of consumer sentiment declined to 78 in October from 78.3 a month earlier, according to the median estimate of 71 economists in a separate Bloomberg survey. The September reading was the strongest since May.
The central bank is swapping shorter-term debt in its holdings for longer maturities as part of its efforts to support the economy. It plans to buy as much as $2.25 billion of Treasuries due from February 2036 to August 2042 today as part of the plan, according to the Fed Bank of New York website.
Swap Spread
Yields indicate growing demand for debt outside the Treasury market.
The spread between two-year interest-rate swaps and same- maturity Treasury yields narrowed to as little as 10.8 basis points, the least since March 2010.
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.
Bonds in an index of corporate investment-grade and high- yield securities yielded 2.38 percentage points more than Treasuries as of yesterday, according to Bank of America Merrill Lynch data. Investor demand for company debt has narrowed the spread from 3.48 percentage points at the end of last year.
Securities in the index have returned 10 percent this year, versus 2.1 percent for Treasuries.
Treasuries are still headed for a weekly gain as some reports signal the recovery will be slow and uneven.
“People feel uneasy about the economy,” said Akira Takei, the head of the international fixed-income department in Tokyo at Mizuho Asset Management Co., which oversees the equivalent of $42 billion and is a unit of Japan’s third-biggest publicly traded bank. “The rally is just beginning.”
IMF Managing Director Christine Lagarde, speaking in Tokyo, said the world financial system isn’t much safer than when Lehman Brothers Holdings Inc. collapsed in 2008.
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 editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net
