BLBG:Treasuries Advance on Austerity Warning as Election Looms
Treasury 10-year notes advanced for a second day as Americans prepare to choose a leader who will face unprecedented debt levels and a round of tax increases and spending cuts, which threaten to slow the economy.
The benchmark securities extended a gain from last week as global finance chiefs pressed the U.S. to avoid harming the fragile world economy with excessive austerity. President Barack Obama and challenger Mitt Romney will ask voters to choose who will steer the economy over the next four years in tomorrow’s vote. The winner will have to contend with the so-called fiscal cliff of more than $600 billion of Federal belt-tightening in January unless Congress acts.
“There is a chance of slightly lower yields if Obama wins,” said Michael Leister, a strategist at Commerzbank AG in London. “This is largely priced in, however, so price moves should be subdued. Worries on the fiscal cliff are important, but an imminent resolution remains unlikely as the election will probably result in split majorities.”
The U.S. 10-year yield fell three basis points, or 0.03 percentage point, to 1.69 percent at 9:27 a.m. London time, according to Bloomberg Bond Trader data. The price of the 1.625 percent note due in August 2022 rose 1/4, or $2.50 per $1,000 face amount, to 99 14/32.
The yield declined three basis points last week. The record low was 1.38 percent set July 25.
Group of 20 finance ministers and central bankers meeting in Mexico City pushed for swift action to head off the fiscal cliff.
Elevated Risks
“I expect each country to voice its hopes for firm efforts toward a resolution of the fiscal-cliff problem,” Bank of Japan (8301) Governor Masaaki Shirakawa told reporters late yesterday. “It’s important for each country to work toward stabilizing its own economy.”
A draft of the statement to be issued by G-20 policy makers described growth as modest and risks elevated, said an official from one of the countries who asked not to be identified because the statement hasn’t been finalized.
If Obama wins the election, 10-year yields will probably decline to 1.5 percent or lower as fiscal cliff-related worries pick up, Barclays Plc analysts Hamish Pepper in Singapore and New York-based Anshul Pradhan wrote today in an e-mailed note. If Romney wins, yields may rise to 2 percent, they wrote.
Bond Purchases
The U.S. central bank plans to buy as much as $2.25 billion of Treasuries maturing from February 2036 to August 2042 today, according to Federal Reserve Bank of New York’s website. The Fed is swapping shorter-term Treasuries in its holdings with those due in six to 30 years as part of its efforts to support the U.S. economy by putting downward pressure on long-term borrowing costs.
The Treasury Department is scheduled to sell $32 billion of three-year notes tomorrow, $24 billion of 10-year securities the next day and $16 billion of 30-year bonds on Nov. 8.
The Institute for Supply Management’s U.S. non- manufacturing index, which covers almost 90 percent of the economy, was 54.5 last month, little changed from 55.1 in September, according to the median forecast of 63 economists surveyed by Bloomberg News before today’s figures at 10 a.m. New York time. Readings above 50 signal growth.
An index of China’s non-manufacturing industries rose to 55.5 in October from 53.7 the month before, the National Bureau of Statistics and China Federation of Logistics and Purchasing said in Beijing on Nov. 3.
Treasuries Caution
“Investors should be cautious on Treasuries,” said Hiroki Shimazu, an economist in Tokyo at SMBC Nikko Securities Inc., a unit of Japan’s third-largest publicly traded bank by assets. “We’re seeing signs of recovery in the two largest economies,” he said, referring to the U.S. and China.
The 10-year yield will be 2 percent by year-end, Shimazu said. A Bloomberg survey of banks and securities companies projects 1.74 percent at Dec. 31 and 2.03 percent by the end of June, with the most recent projections given the heaviest weightings.
A U.S. report on Nov. 2 showed payrolls expanded by 171,000 last month, following a 148,000 gain in September that was larger than first estimated. Unemployment rose to 7.9 percent from 7.8 percent.
The Citigroup Economic Surprise Index, which shows whether U.S. data beat or fell short of forecasts, climbed to 56.6 on Nov. 2, the most since February.
Surprise Index
For the first time since the financial crisis in 2008, all 26 markets tracked by Bloomberg and the European Federation of Financial Analysts Societies including Treasuries are poised to generate returns on an annual basis. Gains this year range from Portugal’s 47 percent to Japan’s 1.78 percent.
After years of spending to bolster their economies, governments are getting a handle on their borrowing. The par amount of debt tracked by Bank of America Merrill Lynch’s Global Sovereign Broad Market Plus Index has risen 7.3 percent this year to $23.6 trillion, the smallest increase since 2005, when it fell 3.7 percent.
“The longer-term bull market in government bonds is still intact all over the world,” Howard Simons, a Bianco Research LLC strategist in Chicago, said in a Nov. 2 phone interview.
To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net; David Goodman in London at dgoodman28@bloomberg.net.
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net
