BLBG:Treasuries Drop Before Homes Data on Italy President Win
Treasuries fell for a second day before a report analysts said will show purchases of previously owned homes rose in March, adding to evidence the U.S. economy is improving and damping demand for the safest assets.
Longer-maturity bonds led the declines as European stocks climbed amid optimism that Giorgio Napolitano, re-elected to a second term as Italy’s president, will take the lead in trying to end the political gridlock that’s left the country without a government for eight weeks. Equities will outperform bonds this year, according to SMBC Nikko Securities Inc. The U.S. is scheduled to sell a total of $99 billion in two-, five- and seven-year notes this week starting tomorrow.
“Treasuries are under pressure because of an improvement in risk sentiment,” said Allan von Mehren, chief analyst at Danske Bank A/S (DANSKE) in Copenhagen. “Maybe the Napolitano re- election is what it will take to get a more stable political situation. We’ve seen a little bit softer U.S. housing data recently but overall the trend is for structural improvement.”
Benchmark U.S. 10-year yields increased two basis points, or 0.02 percentage point, to 1.73 percent at 9:59 a.m. London time, according to Bloomberg Bond Trader data. The price of the 2 percent note due in February 2023 fell 7/32, or $2.19 per $1,000 face amount, to 102 14/32. The rate rose two basis points on April 19. The 30-year bond yield added three basis points today to 2.91 percent.
The Stoxx Europe 600 Index (SXXP) of equities climbed 0.8 percent.
Italian Parliament
Italy’s Napolitano, 87, will be sworn in for a second seven-year term today at 5 p.m. in Rome and could begin consultations on a new government as soon as tomorrow. He was re-elected on April 20 after the country’s divided parliament failed to agree on a candidate in the first five rounds of voting, an impasse that led Democratic Party leader Pier Luigi Bersani to resign.
Purchases of U.S. previously owned homes increased 0.4 percent to a 5 million annualized rate, the highest level since late 2009, according to a Bloomberg survey before today’s data. A separate report this week is forecast to show the world’s largest economy accelerated in the first quarter.
“The slowdown will not continue,” said Hiroki Shimazu, an economist in Tokyo at SMBC Nikko Securities Inc., a unit of Japan’s second-largest publicly traded bank. “Investors will suffer a loss as yields rise.”
The 10-year Treasury rate will climb past 2.5 percent by year-end, Shimazu said. The median forecast in a Bloomberg survey is for the yield to climb to 2.25 percent.
Bond Returns
Treasuries gained 0.9 percent this month as of April 19, according to Bank of America Merrill Lynch indexes. German government bonds returned 0.1 percent, the indexes show.
U.S. Federal Reserve Chairman Ben S. Bernanke has pumped more than $2.5 trillion into the economy to fulfill the central bank’s twin mandates of full employment and price stability.
The central bank today plans to buy as much as $3.75 billion of securities maturing between January 2019 and March 2020, according to the New York Fed’s website.
Wall Street’s biggest bond dealers see little chance the Fed will slow the pace of debt purchases before year end.
Of the 21 primary dealers that trade with the central bank, 14 said in a Bloomberg News survey that the Fed won’t start to reduce its $85 billion monthly bond buying until the last three months of 2013. Twelve forecast they will end in mid-2014 or later. Fifteen say it will take until at least June 2015 for policy makers to raise the record low benchmark interest rate target of zero to 0.25 percent.
‘Only Tool’
“It’s still too early” to end the bond buying, Rajiv Setia, head of U.S. interest-rate research at Barclays Plc in New York, a primary dealer, said in an April 19 telephone interview. “This is the only tool they have. They’re doing all they can. At the end of the day, the benefits outweigh any risks of a bubble for now.” Barclays forecasts the Fed will slow its pace of purchases in the first three months of 2014 and end them by June next year.
Treasury volatility as measured by Bank of America Merrill Lynch’s MOVE index fell to 51.31 basis points last week, the lowest level this year. The average for the past decade is 96.71, and the record low was 51 in December.
This week’s note sales start with a $35 billion two-year auction tomorrow. The U.S. also plans to sell $35 billion of five-year securities on April 24 and $29 billion of seven-year debt the following day.
To contact the reporters on this story: Emma Charlton in London at echarlton1@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net.
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net.
