BLBG:Treasuries Are World’s Worst-Performing Bonds Before Services
Treasuries are the world’s worst-performing sovereign bonds this year amid signs the U.S. economy is improving, extending losses today before a report that analysts said will show service industries expanded.
U.S. government securities due in 10 years or more fell 6 percent in the past six months, the biggest decline among 144 debt indexes tracked by Bloomberg and the European Federation of Financial Analysts Societies. Treasuries slid for the past two weeks as traders bet growth is fast enough to allow the Federal Reserve to trim bond buying, even after data showed employers added fewer jobs than economists forecast last month. The U.S. is scheduled to sell $72 billion of notes and bonds this week.
“While the economy is going modestly well, people are optimistic that at some point it’s going to change up a gear,” said Andy Cossor, Hong Kong-based market strategist at DZ Bank AG, Germany’s fourth-largest lender. “The highlight I think for the U.S. market this week is going to be the run of auctions. I would expect there to be a little bit of concession pressure pushing yields higher.”
The benchmark 10-year yield rose two basis points, or 0.02 percentage point, to 2.62 percent at 6:55 a.m. in New York, according to Bloomberg Bond Trader prices. The 1.75 percent note maturing in May 2023 fell 6/32, or $1.88 per $1,000 face amount, to 92 18/32.
The yield will decline to 2.50 percent in the next six months, DZ Bank’s Cossor said.
Services Expand
The Institute for Supply Management’s Index of U.S. services rose to 53.1 last month from 52.2 in June, according to the median forecast of economists surveyed by Bloomberg News before the figures today. Readings above 50 signal growth in the Tempe, Arizona-based group’s report.
The index covers almost 90 percent of the economy and includes industries ranging from utilities and retailing to health care, housing and communications.
“The U.S. economy is recovering, and it’s much stronger than last year,” said Hiroki Shimazu, an economist in Tokyo at SMBC Nikko Securities Inc., a unit of Japan’s second-largest publicly traded bank by market value. “I’m bearish on Treasuries.”
The Fed is buying $85 billion of Treasuries and mortgage debt each month to put downward pressure on interest rates. Policy makers are discussing whether the economy has improved enough for them to start reducing the purchases.
The U.S. 10-year yield slid 11 basis points on Aug. 2 after the Labor Department said non-farm payrolls increased 162,000 last month, compared with a median forecast for 185,000. The unemployment rate dropped to 7.4 percent from 7.6 percent.
Fed Tapering
“The U.S. employment report, with weaker-than-expected NFPs but also lower unemployment rate, does not alter our economists’ view that the Fed is most likely to start tapering its Treasuries and MBS purchases after the next FOMC on 18 September,” Ciaran O’Hagan, head of European rates strategy at Societe Generale SA in Paris, wrote in e-mailed note today. “The correction lower in USD rates should hence be seen as an opportunity to increase or add to medium-term U.S. Treasury shorts.” A short position is a bet an asset will decline.
Treasury trading volume on Aug. 2 at ICAP Plc, the largest inter-dealer broker of U.S. government debt, was $393.4 billion. Volume averaged $277.8 billion a day in July, versus $446.2 billion in June.
Treasury Supply
The U.S. is scheduled to sell $32 billion of three-year notes tomorrow, $24 billion of 10-year debt the next day and $16 billion of 30-year bonds on Aug. 8, raising $2.4 billion of new cash as investors will redeem $69.6 billion of securities.
The spread between Treasury five- and 10-year yields was 1.24 percentage points, wider than that of higher-rated sovereigns, showing fixed-income investors anticipate the U.S. will grow faster than its peers, data compiled by Bloomberg show.
Two years after Standard & Poor’s stripped the U.S. of its top rating, gross domestic product is forecast to grow 2.7 percent in 2014, the fastest of any Group-of-10 nation, surveys of economists by Bloomberg show. The budget deficit is the narrowest since 2008.
While an S&P managing director said in March other credit raters would “catch up” to its downgrade, the company and Moody’s Investors Service have since changed their outlooks to “stable” from “negative.”
“The U.S. is really leading the way in the developed world for recovery,” Kathleen Gaffney, a money manager in Boston for Eaton Vance Corp. (EV), which oversees $261 billion, said on Aug. 2 in a telephone interview. “We’re at an important inflection point where the economy really has the potential to pick up some steam.”
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
