BLBG:Treasuries Snap Gain Before Durable Goods, GDP Reports
Treasuries fell, extending last week’s decline, before reports this week that are forecast to show a recovery in the world’s largest economy is gathering momentum.
Benchmark 10-year notes dropped for the fifth time in six days as analysts said data will show durable-goods orders rose in September and growth accelerated in the third quarter. The Treasury is scheduled to sell $99 billion of two-, five- and seven-year notes this week, while the Federal Reserve’s policy- setting committee will begin a two-day meeting tomorrow. The risks of a further sharp selloff in Treasuries are elevated, according to JPMorgan Chase & Co.
“There have been improvements in key data and there could be some news in this week’s releases in the U.S. which would weigh further on Treasuries,” said Niels From, chief analyst at Nordea Bank AB in Copenhagen. “We still believe there is upside potential in Treasury yields from here.”
The 10-year yield climbed four basis points, or 0.04 percentage point, to 1.81 percent at 7:35 a.m. New York time after dropping seven basis points on Oct. 19, according to Bloomberg Bond Trader prices. The 1.625 percent note due August 2022 fell 11/32, or $3.44 per $1,000 face amount, to 98 13/32.
Nordea forecasts the benchmark yield will rise to 2 percent by year-end, From said.
‘Upside Risks’
Durable goods orders increased 7 percent last month, after falling 12.2 percent in August, according to a Bloomberg News survey before the Oct. 25 Commerce Department report. The department will say on Oct. 26 that gross domestic product expanded at a 1.8 percent annual pace in the three months ended Sept. 30, up from 1.3 percent the previous quarter, a separate survey showed.
Housing starts in the U.S. surged 15 percent in September to the highest level in four years, according to a report on Oct. 17, adding to signs of a revival in the industry at the heart of the financial crisis.
“Virtually every driver of Treasury rates is now pushing rates higher,” fixed-income strategists at JPMorgan Chase including Terry Belton wrote in an Oct. 19 report, citing stronger economic data and a reduction in euro-area stress as reasons for the risks to their fourth-quarter 10-year yield target of 2 percent to be “skewed to the upside.”
Spain’s 10-year bond yield fell to the least in more than six months last week after Moody’s Investors Service kept the nation’s credit rating at investment grade, easing concern holders tracking indexes would be forced to sell the debt.
Treasury Auction
The Treasury is scheduled to auction $35 billion of two- year notes tomorrow, the same amount of five-year debt the following day and $29 billion of seven-year securities on Oct. 25.
The Fed’s policy-setting meeting marks the second last gathering scheduled for this year. The central bank in September unveiled an open-ended plan to buy $40 billion a month of mortgage debt in a third round of asset purchases known as quantitative easing.
All 21 primary dealers that trade with the Fed expect its latest QE measures to be expanded to include government securities as gains in U.S. employment and consumer confidence prove unsustainable, according a survey last week by Bloomberg.
Rather than increasing on speculation the Fed’s latest measures would spur the economy, volatility in the bond market has held at about the lowest since 1988, a sign of demand for the safety of Treasuries.
Fed ‘Dissatisfied’
Bank of America Merrill Lynch’s MOVE Index, which measures volatility based on prices of over-the-counter options on securities maturing in two to 30 years, ended last week at 68.5, down from the year’s high of 95.4 on June 15.
“The Fed has said they are dissatisfied with the pace of the recovery, particularly the improvement of labor-market conditions,” Michael Gapen, director of U.S. economic research at Barclays Plc in New York and a former central bank economist, said in a telephone interview Oct. 17. “They have said they want to do more to generate a stronger recovery and to keep doing more until they get the recovery they want.”
The Fed is also seeking to extend the maturity of its Treasury holdings by selling shorter-term debt and buying longer-dated notes. As part of the program, it is scheduled to buy today as much as $2.25 billion of debt maturing in February 2036 to August 2042.
“We anticipate that the Fed will announce at the December 11-12 meeting that they will continue to purchase long-term Treasuries while suspending the sales component of the program,” Jefferies & Co. analysts, led by Ward McCarthy, chief financial economist, wrote in a research note on Oct. 19.
EU Sentiment
The decline in Treasuries was tempered amid speculation the euro region’s economy will worsen, boosting the attraction of safer assets.
The European Commission will say tomorrow that an index of the region’s consumer confidence was at minus 25.9 this month, according to the median estimate of economists. That would be unchanged from September and the lowest since May 2009.
“Europe’s economy is worsening, which is a positive for U.S. Treasuries,” said Akira Takei, head of the international fixed-income department in Tokyo at Mizuho Asset Management Co., which oversees the equivalent of $42 billion. “There was the calm before a storm in the stock market, and we’ll probably see the beginning of a long-term decline in equities.”
To contact the reporters on this story: Neal Armstrong in London at narmstrong8@bloomberg.net; Masaki Kondo in Singapore at mkondo3@bloomberg.net
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net
