BLBG:Treasuries Snap Gain Before Auctions, Presidential Vote
Treasury 10-year notes fell for the first time in three days as the U.S. prepared to sell $72 billion of coupon-bearing debt this week, starting with $32 billion of three-year securities today.
Longer maturities led the decline as U.S. voters head to the polls today to decide whether President Barack Obama or challenger Mitt Romney will guide the world’s biggest economy for the next four years. Whoever wins will face the job of avoiding the so-called fiscal cliff of $607 billion in spending cuts and tax increases scheduled to take effect in January.
“An Obama victory has been priced in,” said Craig Collins, managing director of rates trading at Bank of Montreal (BMO) in London. “Anything other than that would be a spook to the market. How the supply this week is absorbed is going to be a great barometer of what kind of demand we have post election.”
The 10-year yield climbed two basis points, or 0.02 percentage point, to 1.71 percent at 6:09 a.m. New York time, according to Bloomberg Bond Trader prices. The 1.625 percent note due in August 2022 fell 6/32, or $1.88 per $1,000 face amount, to 99 9/32.
The 10-year yield will be 1.73 percent at Dec. 31 and rise to 2.03 percent by the end of June, according to a Bloomberg survey of banks and securities companies with the most recent projections given the heaviest weightings.
Debt Auction
The previous auction of three-year debt on Oct. 9 drew bids for a record 3.96 times the amount of securities available. The U.S. is scheduled to sell $24 billion of 10-year notes tomorrow and $16 billion of 30-year bonds on Nov. 8.
Obama led Romney 48 percent to 45 percent in an Oct. 31- Nov. 3 national poll conducted by the Pew Research Center, a survey that showed the candidates tied at 47 percent a week ago. The final tracking poll by ABC News and the Washington Post had Obama taking a lead of 50 percent to 47 percent in a survey of 2,345 likely voters conducted Nov. 1-4.
U.S. yields will move higher “no matter who the president is,” Andrew Stenwall, chief executive officer of Peridiem Global Investors LLC, said from London.
“Re-election of President Obama will result in flatter interest rates for a longer period of time, while more pro- growth policy will result in higher interest rates,” Stenwall said on Bloomberg Television’s “Countdown” with Maryam Nemazee. “We’re positioning short in the U.S.,” he said, referring to a bet an asset will decline.
Treasury 10-year yields will rise to 3.50 percent in the next 12 to 18 months, Stenwall said.
Late Ballots
Bob Doll, an adviser to BlackRock Inc. (BLK), the world’s biggest money manager with $3.68 trillion in assets, wrote in a report that the election may be so close that the outcome will depend on recounts and late ballots.
“Should this happen, we may not know the result for several days or even weeks,” Doll wrote yesterday on BlackRock’s website.
Treasuries have returned 15 percent since Obama took office on Jan. 20, 2009, according to Bank of America Merrill Lynch indexes. The Standard & Poor’s 500 Index handed investors a 91 percent gain including reinvested dividends, according to data compiled by Bloomberg.
Even as Obama increased the U.S. publicly traded debt to a record $10.8 trillion as of August, investors have been willing to accept lower interest rates as the central bank buys bonds as a way to sustain the expansion and as inflation holds in check.
‘Modest Buying’
After purchasing $2.3 trillion of Treasuries and mortgage- related bonds, the Federal Reserve on Oct. 24 reiterated its plan to continue unprecedented stimulus measures by buying $40 billion of home-loan securities a month until the labor market improves “substantially.”
“If Obama wins, the initial reaction might still be some modest buying of fixed income, on the view that the Fed will be encouraged to proceed” with its bond-buying program, Steven Englander, head of Group of 10 currency strategy at Citigroup Inc. in New York, wrote in an e-mailed note. A Romney victory would result it a “broad sell-off” of fixed income, he said.
Fed Bank of San Francisco President John Williams said the central bank’s unprecedented bond buying may bring unintended consequences as it boosts economic growth without causing inflation to accelerate.
“A policy tool with uncertain effects should not be discarded,” Williams said to students and faculty at the University of California, Irvine. “Conducting monetary policy always involves striking the right balance between the benefits and risks of a policy action,” including higher inflation and excessive risk-taking.
Fed Buying
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 U.S. central bank plans to buy as much as $5.25 billion of Treasuries maturing from November 2018 to August 2020 today, according to Fed Bank of New York’s website.
The difference between yields on 10-year notes and same- maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt, was 2.48 percentage points. Consumer prices have increased at an average rate of 2.5 percent for the past decade, after the inflation rate reached 14.8 percent in 1980.
To contact the reporters on this story: David Goodman in London at dgoodman28@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net
