BLBG; Treasuries Fall on Speculation U.S. to Increase Citigroup Stake
Treasuries fell, paring two weeks of gains, as stocks rose on speculation the U.S. plans to boost its stake in Citigroup Inc., increasing the likelihood of additional debt sales as borrowing soars.
Ten-year securities led the declines as the MSCI World Index snapped nine days of losses after the Wall Street Journal reported Citigroup is in talks with federal officials. The U.S. is scheduled to sell a record $94 billion of notes this week, raising speculation investors will demand higher yields to purchase the securities.
“Citi approached the U.S. government, and that has flipped around equities to the detriment of bonds,” said Andrew Brenner, co-head of structured products and emerging markets in New York at MF Global Inc.
Ten-year yields increased seven basis points, or 0.07 percentage point, to 2.86 percent at 8:25 a.m. in New York, according to BGCantor Market Data. The price of the 2.75 percent security due in February 2019 fell 18/32, or $5.63 per $1,000 face amount, to 99 1/32.
The benchmark note’s yield, which touched a record low of 2.04 percent on Dec. 18, has averaged 4.65 percent during the past decade. It slid 10 basis points last week as falling stocks drove investors to bonds.
Treasuries extended losses after bank regulators issued a statement in Washington saying the U.S. “stands firmly behind” the banking system.
The U.S. government may end up with as much as 40 percent of Citigroup’s common stock, the Wall Street Journal said citing people familiar with the matter.
‘Wall of Supply’
“Treasuries face a wall of supply and the fact that Citigroup may need more government intervention means there may be more sovereign bond issuance to come,” said Nick Stamenkovic, a fixed-income strategist in Edinburgh at RIA Capital Markets, a securities broker for banks and institutional investors. “That’s unnerving investors.”
Banks may have to be nationalized for “a short time” to help lenders such as Citigroup and Bank of America Corp. survive the U.S. economic slump, Senate Banking Committee Chairman Christopher Dodd said Feb. 20.
U.S. yields indicate bets on inflation have been rising over the past three months.
The difference between rates on 10-year notes and Treasury Inflation Protected Securities, or TIPS, which reflects the outlook among traders for consumer prices, was 115 basis points. The spread climbed from minus eight basis points in November, and the six-month average is 95 basis points.
Stocks Advance
Consumer prices were unchanged over the past 12 months, a Labor Department report showed Feb. 20, meaning bond investors aren’t losing anything to inflation. The so-called real yield of 2.81 percent is close to the most since 2006.
Stocks in Europe and Asia climbed, pushing the MSCI World Index up 0.6 percent. Stocks on the Standard & Poor’s 500 Index rose 0.9 percent.
Government efforts to support the banking system will help corporate bonds outperform Treasuries, David Kotok, Vineland, New Jersey-based chief investment officer at Cumberland Advisors Inc., wrote in a report today.
“The story circulating about Citigroup is a way for the idea of nationalization to get vetted,” wrote Kotok, who oversees $1 billion.
Treasuries have handed investors a 2.7 percent loss so far in 2009, while U.S. company bonds returned 1 percent, according to indexes complied by Merrill Lynch & Co.
The Treasury Department plans to auction $40 billion of two- year notes tomorrow, a record $32 billion of five-year securities Feb. 25 and a record $22 billion of seven-year debt Feb. 26.
Less Bearish
The U.S. will probably borrow $2.5 trillion during the fiscal year ending Sept. 30, according to Goldman Sachs Group Inc., one of the 16 primary dealers required to bid at U.S. debt sales. The figure is almost triple the $892 billion in notes and bonds it sold in the previous 12 months.
Fund managers became less bearish on Treasuries last week, a survey by Ried, Thunberg & Co. showed.
The company’s index measuring the investor outlook through the end of March rose to 44 in the seven days ended Feb. 20 from 43 the week before. The economic analysis firm in Jersey City, New Jersey, surveyed 25 fund managers controlling $1.39 trillion. A reading below 50 means investors expect prices to fall.
‘Barometer of Fears’
For all the $9.7 trillion pledged by the U.S. to combat the financial crisis, money markets show the world’s biggest banks see no recovery before 2010.
The premium banks charge each other for short-term loans, the so-called Libor-OIS spread, rose above 1 percentage point last week for the first time since Jan. 9. Contracts traded in the forward market indicate the gauge, which measures banks’ reluctance to lend, will remain higher for the rest of the year than before Sept. 15, when the bankruptcy of Lehman Brothers Holdings Inc. froze credit markets.
“Libor-OIS remains a barometer of fears of bank insolvency,” former Federal Reserve Chairman Alan Greenspan said in an interview. “That fear has been substantially reduced since mid-October, but the decline has stalled well short of any semblance of normal markets.”
The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, rose to 97 basis points from 91 basis points on Feb. 10.
