BLBG:Treasuries Extend Monthly Gain Before Durable Goods Data
Treasuries rose, extending their first monthly gain since November, before a report that economists said will show durable goods orders fell, boosting the case for the Federal Reserve to maintain bond purchases.
Longer maturities led gains as an inconclusive election in Italy along with U.S. spending cuts set for March 1 are increasing investor appetite for the safest assets. The Treasury plans to auction $29 billion of seven-year notes today as Fed Chairman Ben S. Bernanke prepares to testify before lawmakers for a second day. He signaled yesterday the Fed is prepared to keep buying bonds at its present pace as he dismissed concerns record easing risks sparking inflation.
“The resurgence of euro-area tensions post the Italian elections has seen a flight to quality and bid for safe-haven assets which has benefited Treasuries,” said Richard McGuire, a senior fixed-income strategist at Rabobank International in London. “We have the looming fiscal cliff in the U.S. and yesterday’s testimony from Bernanke showing the Fed was still open to maintaining its current very accommodative stance.”
The benchmark 10-year yield fell two basis points, or 0.02 percentage point, to 1.87 percent at 7:11 a.m. New York time, according to Bloomberg Bond Trader prices. The rate has dropped 12 basis points since Jan. 31. The 2 percent note due February 2023 gained 5/32, or $1.56 per $1,000 face amount, to 101 7/32.
U.S. government debt returned 0.6 percent in February, after sliding 1 percent the previous month, according to Bank of America Merrill Lynch indexes.
Durable Goods
Orders for durable goods declined 4.7 percent in January, after increasing 4.3 percent in December, according to a Bloomberg News survey of economists before the Commerce Department report at 8:30 a.m. in Washington. Separate data will show existing home sales rose, according to the surveys.
Treasuries began the week with their biggest one-day rally since November as Italy concluded its election without a winner.
European Union leaders urged the country’s political factions to form a government committed to austerity measures the nation implemented to help pay its debt and keep the euro as its currency.
“Everyone is looking for risk-free assets right now,” said Kim Youngsung, head of fixed income in Seoul at Samsung Asset Management Co., South Korea’s largest private bond investor with the equivalent of $104 billion in assets. “We had forgotten about the European debt crisis for a while, but the Italian election was a reminder that it’s an ongoing problem.”
Spending Cuts
Congress mandated $1.2 trillion in across-the-board spending cuts to begin March 1 and be spread over nine years as part of a 2011 agreement to increase the U.S. debt limit.
Bernanke is scheduled to testify before U.S. lawmakers starting at 10 a.m. in Washington.
“We do not see the potential costs of the increased risk- taking in some financial markets as outweighing the benefits of promoting a stronger economic recovery,” Bernanke said yesterday in testimony to the Senate Banking Committee.
The Fed is buying $85 billion of Treasury and mortgage bonds a month to support the economy by putting downward pressure on interest rates, a policy known as quantitative easing.
The 10-year term premium, a model that includes expectations for interest rates, growth and inflation, reached minus 0.73 percent this week, the most costly level since Jan. 23. A negative reading indicates investors are willing to accept yields below what’s considered fair value.
Debt Sales
The seven-year notes being sold today yielded 1.25 percent in pre-auction trading, down from 1.416 percent at the previous sale of similar-maturity securities on Jan. 30. That compares with a record-low auction yield of 0.954 percent on July 26.
The U.S. allotted $35 billion of five-year securities yesterday and the same amount of two-year debt on Feb. 25.
“It’s very difficult to see yields going much higher,” said Kei Katayama, who buys non-yen debt for Daiwa SB Investments Ltd. in Tokyo, which manages the equivalent of $54.2 billion and is part of Japan’s second-largest brokerage. “Treasuries are very expensive, but there is an effect from quantitative easing. I can’t ignore that.”
Katayama said he holds fewer Treasuries than the percentage in the benchmarks he uses to gauge performance but is considering adding them.
Treasury 10-year yields will fall to 1.85 percent by the end of March and then climb to 2.31 percent by Dec. 31, based on a Bloomberg survey of financial companies with the most recent projections given the heaviest weightings.
To contact the reporters on this story: Lucy Meakin in London at lmeakin1@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net
