BLBG:Treasuries Snap Gain as Greek Deal Cuts Demand for Safety
Treasuries snapped a rally from yesterday as euro-area officials agreed on a Greek aid plan, curbing demand for the relative safety of U.S. debt.
Gains in Asian shares helped damp investor appetite for U.S. securities as investors prepared to bid at three auctions this week. The Treasury Department is scheduled to sell $35 billion of two-year securities today, the same amount of five- year debt tomorrow and $29 billion of seven-year notes on Nov. 29. The bond market is in a “bubble,” according to Schroders Plc (SDR), the London-based asset manager that oversees $327.4 billion.
“Some of the uncertainty in the European debt crisis may be resolved,” said Kazuaki Oh’e, a debt salesman in Tokyo at CIBC World Markets Japan Inc., a unit of Canada’s fifth-largest lender. “It’s good news for equities and bad news for the bond market.”
Ten-year yields were little changed at 1.67 percent as of 6:10 a.m. in London, according to Bloomberg Bond Trader data. The price of the 1.625 percent security due in November 2022 was 99 18/32. The yield slid three basis points, or 0.03 percentage point, yesterday, the biggest decline in more than two weeks.
The MSCI Asia Pacific Index (MXAP) of stocks advanced 0.4 percent today, headed for its fifth gain.
Japan’s 10-year rate was little changed at 0.73 percent. It has been in a range of 0.725 percent to 0.76 percent for two weeks.
Greek Deal
Euro-area finance ministers cut Greece’s interest rates and gave it more time to pay back rescue loans while dismissing for now calls for debt relief.
With U.S. inflation measured by consumer prices running at 2.2 percent, benchmark 10-year Treasuries have a so-called real yield of negative 0.53 percent.
“The bond bubble in the developed world has yet to burst,” Alan Brown, a senior adviser at Schroders, wrote on the company’s website yesterday. “Bond markets have enjoyed a 30- year bull market taking real yields into negative territory. Returns in the future cannot match those of the past unless yields continue to decline yet further.”
Such a rally would take real yields to “implausible” levels, Brown wrote.
The approach of the fiscal cliff of spending cuts and tax increases is making some fund managers reluctant to sell, said Kei Katayama, who buys U.S. government debt in Tokyo for Daiwa SB Investments Ltd., which manages the equivalent of $60.6 billion and is a unit of Japan second-largest brokerage.
Washington Negotiations
President Barack Obama is working with lawmakers to try to ease the measures to keep gross domestic product growing. Ten- year yields have held in a 35-basis-point range for almost four months as investors monitored progress on the negotiations.
“Nobody’s willing to push yields higher,” Katayama said. “Everyone believes there will be some kind of compromise, but nobody can say exactly what the influence will be on GDP. That’s the reason Treasury yields are staying in a very narrow range.”
Investors should buy 10-year notes if yields rise to 1.683 percent and add if rates climb “meaningfully” past 1.7 percent, Nomura Holdings Inc. wrote in a report yesterday.
“We expected bearish momentum to stall in the rates market as fiscal cliff discussions pick up,” George Goncalves, Helin Gai and Jeffrey Young, Nomura strategists in New York, wrote.
Demand for durable goods probably decreased in October, economists said before the Commerce Department reports the figure at 8:30 a.m. New York time today.
Bookings for goods meant to last at least three years dropped 0.7 percent last month, according to the median forecast of 75 economists surveyed by Bloomberg News. That compares with a 9.8 percent increase in September. Other data today may show property values and consumer confidence rose, according to surveys.
Fed Purchases
The Federal Reserve plans to buy as much as $2 billion of Treasuries maturing from February 2023 to February 2031 today, according to the Fed Bank of New York’s website.
The purchases are part of the central bank’s effort to put downward pressure on long-term borrowing costs by selling shorter-term Treasuries from its holdings and buying those due in 6 to 30 years, under a program scheduled to end next month.
Investors should own two-year notes as the program draws to a close, according to Bank of America Corp. strategists Priya Misra in New York and Bin Gao and Adarsh Sinha in Hong Kong, in a Nov. 23 report. Bank of America owns Merrill Lynch, which is one of the 21 primary dealers that underwrite the U.S. debt.
The two-year notes scheduled for sale today yielded 0.275 percent in pre-auction trading, versus the average of 0.27 percent for the past year. Because of their shorter maturity, the securities are more sensitive than longer-term bonds to the Fed’s target for overnight bank lending, which policy makers have pledged to keep near zero percent at least through the middle of 2015.
The last two-year sale on Oct. 23 drew record purchases from the group of investors that includes pension funds and insurance companies. So-called direct bidders, or institutional investors outside of the primary dealers, bought 38.2 percent of the notes.
To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.
To contact the editor responsible for this story: Garfield Reynolds at greynolds1@bloomberg.net
