BLBG: Treasuries Are Little Changed; Report May Show Services Shrank
Treasuries were little changed, snapping yesterday’s loss, before a private report that economists estimate will show a contraction in U.S. service industries quickened in January.
The U.S. recession will slow demand for corporate bonds and buoy Treasuries, fixed-income strategist Michael Brandes and researcher Steve Reich at Citi Private Bank in New York wrote in a report. The government may sell $69.25 billion in notes and bonds next week, based on the average forecast of six firms surveyed by Bloomberg News before a Treasury announcement today.
“Demand for safer assets is very strong,” said Satoshi Okumoto, general manager in Tokyo at Fukoku Mutual Life Insurance Co., which has $63.7 billion in assets. “The world economy is suffering. Nobody can buy cars. Nobody can buy houses. We will see weak figures for the time being.”
The 10-year yield declined one basis point to 2.87 percent as of 12:37 p.m. in Tokyo, according to BGCantor Market Data. The price of the 3.75 percent security due in November 2018 rose 3/32, or 94 cents per $1,000 face amount, to 107 14/32. A basis point is 0.01 percentage point.
Ten-year yields, which tumbled to a record low of 2.04 percent on Dec. 18, averaged 4.56 percent this decade. They will decline to 2.5 percent by year-end Okumoto said.
The Institute for Supply Management’s index of non-factory businesses, which comprise almost 90 percent of the U.S. economy, slid to 39 from 40.1 in December, a Bloomberg News survey showed before the report today. The deepening recession helped bring down U.S. sales at General Motors Corp. and Ford Motor Co. at least 40 percent in January.
“At this stage of the economic cycle -- with a weakening labor market, slowing consumer and business expenditures and deflation risks -- the fundamentals will trump supply concerns in determining the direction of the Treasury yields,” Brandes and Reich wrote in the report yesterday.
Credit Markets
Yields indicate that efforts to thaw credit markets aren’t as effective this year as they were in the last months of 2008.
The London interbank offered rate, or Libor, for three-month dollar loans, rose to 1.23 percent yesterday from as low as 1.08 percent on Jan. 14. It tumbled from 4.82 percent in October, which it reached after Lehman Brothers Holdings Inc. collapsed in September.
The difference between 30-year mortgage rates and 10-year Treasury yields is about 2.26 percentage points, up from 1.64 percentage points five years ago.
The rate Australian banks charge each other for three-month loans jumped 18 basis points to 3.22 percent, Australian Financial Markets Association data show.
Next Week’s Sales
U.S. government securities trimmed initial gains amid concern record sales may sap demand. A $69.25 billion package of three-, 10- and 30-year auctions would be a record. The Treasury Department said on Feb. 2 it would borrow $493 billion this quarter, 34 percent more than initially projected.
“There’s too much issuance,” said Jaemin Cheong, who trades Treasuries in Seoul at Industrial Bank of Korea, the nation’s biggest lender to small- and mid-sized companies. “Yield levels are too low. The bearish market will continue until at least next month.” He’s avoiding Treasuries, he said.
Treasuries fell 3.1 percent in January, the most in almost five years, according to indexes compiled by Merrill Lynch & Co. Bonds slid as President Barack Obama pushes his economic package through Congress and increases debt sales to pay for it. The U.S. Senate is debating the proposal, which may cost almost $900 billion.
Japan, Australia
Japan and Australia are also increasing spending.
The Bank of Japan said yesterday it will buy 1 trillion yen ($11.2 billion) of stocks to help the economy. The Ministry of Finance said it may sell a record 40.6 trillion yen of debt in the financial year starting April 1, 2011.
Japanese bonds fell for a fifth day today, the longest losing streak since July 2007. The yield on the 1.3 percent security due in December 2018 climbed three basis points to 1.325 percent, according to Japan Bond Trading Co., the nation’s largest interdealer debt broker.
The Australian government plans to sell a record A$22 billion ($14.2 billion) to A$24 billion of debt through June 30 to fund its own economic plans. Yields on the country’s 5.25 percent bonds due March 2019 rose to a four-week high of 4.335 percent.
