BLBG:Treasury Volatility Falls to 5-Year Low; Japan Bonds Gain
Treasury market volatility dropped to the lowest level in five years as the pending U.S. fiscal cliff and forecasts for the Federal Reserve to increase its bond purchases kept alive demand for the safety of government debt.
Bank of America Merrill Lynch’s MOVE index, which measures price swings based on options, fell to 51.7 yesterday in the U.S., extending its decline to the least since May 2007. The Treasury Department is scheduled to sell $35 billion of five- year notes today and $29 billion of seven-year securities tomorrow, after a two-year auction yesterday drew record demand. Japan’s 10-year yields matched the least in nine years.
“A low-yield environment is in place,” said Tomohisa Fujiki, an interest-rate strategist in Tokyo at BNP Paribas SA, whose New York unit is one of the 21 primary dealers obliged to bid at U.S. debt sales. “Most market participants expect the Fed to extend quantitative easing. We have some concerns about the fiscal cliff, and that that is supportive for Treasuries.”
U.S. 10-year yields were little changed at 1.63 percent as of 6:53 a.m. in London, according to Bloomberg Bond Trader data. The price of the 1.625 percent security due in November 2022 was 99 31/32.
The rate slid five basis points, or 0.05 percentage point, over the past two days. It is less than the average of 3.68 percent over the last decade.
Japan’s 10-year yield fell 1 1/2 basis points to 0.715 percent today, the least since 2003.
Treasuries have returned 2.5 percent this year, versus 2 percent for Japanese debt and 4.3 percent for sovereign bonds around the world, according to Bank of America Merrill Lynch indexes.
Budget Deadlock
U.S. Senate Majority Leader Harry Reid said yesterday Democrats and Republicans have made little headway in negotiations over how to avoid a year-end fiscal cliff of spending cuts and tax increases that are threatening the economy.
At yesterday’s $35 billion two-year auction, investors bid for 4.07 times the amount of debt offered, matching the record high in November 2011.
Signs of improvement in the economy may send Treasuries down, said Park Sungjin, the head of asset management for Meritz Securities Co. in Seoul. Park said he is considering betting against, or shorting, five-year notes.
“I’m focused on the current recovery, especially in the housing market,” said Park, who oversees the equivalent of $7 billion.
Home Data
New home sales probably extended their advance to a two- year high in October, according to a Bloomberg News survey of economists before the Commerce Department reports the figure at 10 a.m. New York time today. The Fed is scheduled to issue its Beige Book economic report at 2 p.m. New York time.
The Commerce Department will probably increase its estimate of third-quarter economic growth to 2.8 percent from 2 percent when it issues the figure tomorrow, based on a separate Bloomberg survey.
China, the U.S.’s largest overseas creditor, may limit its purchases of Treasuries because the central bank has reduced its buying of dollars, according to an academic who has served as a government adviser.
The People’s Bank of China has “noticeably” cut its purchases of dollars from local banks to allow commercial lenders to trade among themselves, Ding Zhijie, dean of finance at Beijing’s University of International Business and Economics, said in a Nov. 23 interview. That may cap the nation’s foreign- exchange reserves and consequently its demand for U.S. debt, he said.
Fed Purchases
The Fed is putting downward pressure on yields, after buying $2.3 trillion of Treasuries and mortgage-related bonds since 2008 in two rounds of quantitative easing, or QE. The central bank said Oct. 24 it would extend its stimulus by purchasing $40 billion of home-loan securities a month until the labor market improves “substantially.”
The central bank is also selling shorter-term Treasuries from its holdings and buying those due in 6 to 30 years, under a program scheduled to end next month.
It plans to purchase as much as $2.25 billion of Treasuries maturing from February 2036 to November 2042 today, according to the Fed Bank of New York’s website. It is also scheduled to snap up as much as $5.25 billion of securities due from November 2018 to November 2020, the website shows.
All 21 primary dealers forecast the central bank will resume its Treasury purchases when the swap program ends, according to a Bloomberg survey conducted in the week ending Oct. 19.
Reducing Unemployment
Fed Bank of Chicago President Charles Evans said yesterday the central bank should keep interest rates near zero until unemployment falls to 6.5 percent or below as long as inflation is under 2.5 percent, aligning himself more closely with other Fed officials. The unemployment rate was 7.9 percent in October and consumer prices rose at an annual pace of 2.2 percent, according to the Labor Department.
Evans previously proposed 7 percent for the jobless rate and 3 percent for inflation.
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
