BLBG:Treasuries Rise Before Housing Data Amid Budget Concern
Treasuries rose for the first time in three days before a report forecast to show U.S. homebuilding stalled in November and as a budget showdown threatens to send the economy into recession.
Yields on 30-year bonds fell from a three-month high before lawmakers vote tomorrow on a Republican plan to avert the so- called fiscal cliff of more than $600 billion in tax increases and spending cuts. House Speaker John Boehner will use the ballot to oppose a tax rise sought by President Barack Obama. Data tomorrow is forecast to show the U.S. economy grew an annualized 2.8 percent in the three months ended Sept. 30. The Treasury will auction $29 billion of seven-year notes today.
“The focus is still 100 percent on the fiscal cliff,” said Marc Ostwald, a rates strategist at Monument Securities Ltd. in London. “It’s all very well Boehner and Obama cooking up a deal but will it be passed by Congress, which is the more important part of the equation? The Treasury curve will move steeper” when a deal is passed, he said, meaning the difference in yields between long- and short-dated securities will widen.
The 30-year yield slipped one basis point, or 0.01 percentage point, to 2.99 percent at 6:30 a.m. New York time after rising to 3.03 percent yesterday, the highest since Sept. 17. The 2.75 percent security due in November 2042 rose 7/32, or $2.19 per $1,000 face amount, to 95 10/32. The benchmark 10-year yield also fell one basis point, to 1.81 percent.
Fed’s Purchases
Housing starts fell to 872,000 annual rate after reaching a four-year high 894,000 rate in October, according to the median of 85 estimates in a Bloomberg News survey before today’s data.
The Fed will buy as much as $2.25 billion of Treasuries today maturing between February 2036 and November 2042, according to the New York Fed’s website. The purchases are part of a program known as Operation Twist, under which the central bank is replacing shorter-maturity notes in its holdings with longer-dated debt.
With the program set to expire this month, the Fed will begin buying U.S. government bonds at a pace of $45 billion a month next year in a new round of so-called quantitative easing that doesn’t involve selling shorter-term securities.
“The Fed’s purchases of bonds are like pouring hot water in a bathtub that’s leaking,” said Akira Takei, head of the international fixed-income department in Tokyo at Mizuho Asset Management Co., which oversees about $39 billion. “The U.S. economy will shrink if the Fed turns off the tap.”
Notes Sale
Ten-year yields may fall to 0.7 percent by the end of next year, Takei said. That would represent a gain of 11 percent, according to data compiled by Bloomberg, and compares with the record low of 1.38 percent set on July 25.
The seven-year notes scheduled for sale today yielded 1.25 percent in pre-auction trading, rising from 1.045 percent at the previous sale of the securities on Nov. 29.
Investors bid for 2.81 times the amount of available seven- year debt last month, compared with the average of 2.56 at an Oct. 25 sale. Direct bidders, non-primary dealers buying for their own accounts, purchased 19.7 percent of the notes, the most on record dating back to 2009.
The House of Representatives votes tomorrow on Boehner’s “Plan B,” which would raise tax rates on income over $1 million, rather than the $400,000 threshold the president proposed in his latest offer. The Obama administration and Democrats rejected the Boehner plan, released yesterday, as inadequate.
With his push for a vote on his proposal, Boehner is looking to pressure Obama to accept deeper spending cuts and a higher threshold for rate increases by showing how hard it will be to win Republican support for any tax increase.
Economic Problems
U.S. 10-year yields climbed 12 basis points over the past two days as some investors speculated lawmakers will reach a deal. Fifty-three percent of Americans say the country will experience major economic problems if no deal is reached, according to a CBS News poll conducted Dec. 12-16.
“There are more signs that we’ll avoid a complete drop off the fiscal cliff,” said Makoto Suzuki, a senior bond strategist in Tokyo at Okasan Securities Co. “There’s a short-term upside to bond yields, though they will remain low throughout next year.”
To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net; Masaki Kondo in Singapore at mkondo3@bloomberg.net
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net.
