BLBG:Treasuries Rise Before Industrial Output Data Seen Slower
Treasuries rose, headed for the biggest gain in a week, before central bank data economists said will show U.S. industrial production slowed last month.
Government securities were set to outperform corporate bonds on a monthly basis for the first time since May as the approach of the so-called fiscal cliff fueled demand for the safety of government securities. Sovereign debt returned 0.7 percent this month as of yesterday, versus a 0.2 percent loss for company bonds, Bank of America Merrill Lynch indexes show. Israel’s Defense Minister Ehud Barak signaled his nation may escalate its military operations against Gaza, bolstering demand for safety.
“People are being a bit more prudent,” said Ali Jalai, who trades U.S. debt in Singapore at Scotiabank, a unit of Bank of Nova Scotia (BNS), one of the 21 primary dealers authorized to deal with the Federal Reserve. “They are worried about the fiscal cliff.”
The yield on U.S. 10-year notes fell two basis points to 1.58 percent at 12:40 p.m. in Tokyo, Bloomberg Bond Trader data show. The 1.625 percent security due November 2022 rose 1/8, or $1.25 per $1,000 face amount to 100 14/32. The rate slid as far as 1.57 percent yesterday, matching the lowest level since Sept. 5. The record low was 1.38 percent set July 25.
Japan’s 10-year rate held at 0.735 percent today, versus this year’s low of 0.72 percent.
U.S. output at manufacturers, mines and utilities rose 0.2 percent in October from the month before, half of September’s increase, according to the median projection of 84 economists surveyed by Bloomberg News before the Fed report at 9:15 a.m. New York time today.
Volatility Drops
Applications for jobless benefits surged by 78,000 to 439,000 in the week ended Nov. 10, the highest level since April 2011, the Labor Department reported yesterday.
Israel began a military operation against militants in the Gaza Strip on Nov. 14. At least 19 Palestinians have been killed, including the leader of the Hamas military wing, and three Israelis died in one of 300 rocket attacks launched from Gaza.
Volatility dropped to a five-year low yesterday. Bank of America Merrill Lynch’s MOVE index, which measures price swings based on options, fell to 55.6, the least since June 5, 2007.
U.S. bonds have been supported since President Barack Obama’s re-election on Nov. 6 as investors turned their attention to the fiscal cliff, the $607 billion of tax increases and spending cuts that will automatically come into force at the beginning of 2013 unless lawmakers act.
Inflation Expectations
Yields show inflation expectations are tumbling.
The difference between yields on 10-year notes and same- maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, slid to 2.35 percentage points. It was the lowest level in almost 10 weeks. The average over the past decade is 2.18 percentage points.
The Fed’s preferred measure of inflation expectations, the five-year, five-year forward break-even rate, fell to 2.73 percent as of Nov. 13, the most recent figure available in data compiled by Bloomberg. It was the lowest level in a month.
Consumer prices increased 2.2 percent in October from the year before, the Labor Department reported yesterday. Inflation, as measured by this gauge, has averaged 2.5 percent over the past decade, after rising to as high as 14.8 percent in 1980.
Foreign Holdings
The U.S. is scheduled to issue its September report on overseas ownership of U.S. debt at 9 a.m. New York time today. Investors outside the nation hold $5.43 trillion of Treasuries, or about half the publicly traded debt, government data show.
The Fed plans to buy as much as $5.25 billion of Treasuries due from February 2021 to November 2022 today as part of its plan to lower borrowing costs, according to the Fed Bank of New York’s website.
Central bank efforts to spur economic growth around the world have the potential to send costs higher, said Marc Seidner, a portfolio manager at Pacific Investment Management Co., home to the world’s biggest bond fund.
“Protecting against inflation is going to become increasingly important,” Seidner said yesterday on the “Bloomberg Surveillance” radio program with Tom Keene. Pimco, based in Newport Beach, California, manages $1.92 trillion.
Seidner recommended 30-year TIPS, which have a positive yield of 0.31 percent. Five-year TIPS yield negative 1.43 percent and 10-year inflation-protected notes have a rate of minus 0.82 percent. The U.S. is scheduled to auction $13 billion of 10-year inflation-linked securities on Nov. 21.
Corporate bonds and stocks may draw investors once the fiscal cliff is resolved, said Jeffrey Rosenberg, chief investment strategist for fixed income at BlackRock Inc. (BLK), the world’s biggest asset manager, overseeing $3.67 trillion.
“When that environment of uncertainty around the fiscal cliff clears, then I may want to go back into those asset classes,” he said Nov. 13 on Bloomberg Radio’s “The Hays Advantage’ with Kathleen Hays.
To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net
To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net
