BLBG:Treasuries Hold Gain; Fischer Says World Near Recession
Treasuries were little changed following a four-day gain after Bank of Israel Governor Stanley Fischer said the world is “awfully close” to a recession, as he backed the Federal Reserve’s increase in bond purchases.
While there has been “a lot of progress made” to improve the global economy, its impact hasn’t materialized, Fischer said in an interview with Bloomberg Television airing today. The Fed announced last month a third round of debt purchases under its policy of quantitative easing, known as QE3. The central bank plans to buy as much as $5.25 billion of Treasuries due from October 2018 to August 2020 today, according to the Fed Bank of New York’s website.
“I am still a buyer of Treasuries,” said Barra Sheridan, a fixed-income trader at BMO Capital Markets Ltd. in London. “I can’t get bearish given the buybacks we have from the Fed this week.”
The benchmark 10-year note yielded 1.67 percent at 7:20 a.m. New York time after dropping nine basis points last week, according to Bloomberg Bond Trader prices. The 1.625 percent security due in August 2022 was at 99 21/32.
An increase to 1.70 percent in 10-year yields would represent a buying opportunity, Sheridan said. A Bloomberg survey of economists with the most recent projections given the heaviest weightings projects the yield will be 1.76 percent by Dec. 31.
‘Awfully Close’
“We’re awfully close” to a global recession, Fischer said in an interview in Tokyo. “It’s pretty slow right now. Europe is technically in a recession. The U.S. is predicting less than 2 percent growth for the next few months.”
China’s exports and money supply grew more than estimated in September from a year earlier, official reports showed on Oct. 13. Consumer prices rose 1.9 percent in September from the year before, government figures showed today. This year’s low was 1.8 percent in July, the least since January 2010.
U.S. retail sales increased 0.8 percent in September from August, gaining for a third month, according to a Bloomberg News survey of economists before the Commerce Department publishes its report at 8:30 a.m. in Washington.
The Fed announced Sept. 13 it will keep its main interest rate at almost zero until at least mid-2015 and buy $40 billion of mortgage debt every month. The U.S. unemployment rate unexpectedly fell to 7.8 percent last month.
‘Substantial Improvement’
“The bar for stopping asset purchases is very high, in our view, and the time needed to gauge whether a substantial improvement in the labor market outlook has happened implies that the current pace of purchases would be maintained at least through the middle of next year, if not well into next,” Barclays strategists including New York-based Anshul Pradhan wrote in an e-mailed note.
Yields indicate growing demand for debt outside the Treasury market.
The difference between two-year interest-rate swaps and same-maturity Treasury yields narrowed to as little as 10.5 basis points on Oct. 12, 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 narrows as demand for higher- yielding assets increases.
Presidential Race
The idea that Democrats are big spenders and bad for bonds while Republicans are deficit hawks is being turned on its head in the $10.8 trillion market for U.S. Treasury securities.
Ever since Lyndon B. Johnson defeated Barry Goldwater for the presidency in 1964, yields on 10-year Treasuries have dropped about 40 basis points in the first month when a Democrat wins, and risen 19 after a Republican victory, according to data compiled by Bloomberg. When applied to the $264 billion in 10- year notes issued in fiscal 2012, the difference means $15.6 billion in interest costs over the life of the debt.
This year’s race for the White House between President Barack Obama and Republican challenger Mitt Romney comes as the U.S. faces $1.2 trillion in mandated spending cuts and tax increases starting Jan. 1 if Congress can’t agree to reduce the deficit, which totaled $1.09 trillion in fiscal 2012. Economic output would shrink by 0.5 percent next year, and joblessness climb to about 9 percent if the so-called fiscal cliff isn’t averted, the Congressional Budget Office said.
“It’s the natural expectation that Democrats would be less business friendly and less positive” for equities, Brett Rose, an interest-rate strategist at Citigroup Inc. in New York who has researched elections and their impact on bonds, said in a telephone interview Oct. 9. That’s “consistent with yields going lower. Republicans are more business-friendly, which leads to higher equity prices and higher Treasury yields,” he said.
To contact the reporters on this story: Neal Armstrong in London at narmstrong8@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net
