BLBG: Treasuries Are Little Changed as Fed Prepares to Buy U.S. Bonds
By Bo Nielsen and Wes Goodman
July 23 (Bloomberg) -- Treasuries were little changed after yesterday’s decline as the Federal Reserve prepared to buy bonds, part of its plan to cap consumer borrowing costs and rejuvenate the economy.
The central bank is scheduled to purchase Treasuries today maturing from August 2026 to May 2039 under a program to gather $300 billion of government securities over six months. The U.S. is scheduled to announce today how much it will raise in four auctions next week.
“The market knows the Fed wants to keep a lid on yields,” said Niels From, chief analyst in Copenhagen at Nordea Bank AB, the biggest Nordic bank by market value. “At the same time we have a lot of supply coming next week which sets an upward pressure on yields. The two opposing forces are keeping Treasuries in a range for the moment.”
The 10-year note yield fell 1 basis point to 3.54 percent as of 11:20 a.m. in London, according to BGCantor Market Data. The 3.125 percent security due May 2019 rose 2/32, or 63 cents per $1,000 face amount, to 96 18/32. It will trade at a yield of 3.6 percent in three months, From said.
A Bloomberg survey of banks and securities companies projects the yield will be 3.67 percent by Dec. 31, with the most recent forecasts given the heaviest weightings. The yield reached 3.72 percent on July 20, the highest level in almost a month.
Treasury purchases by U.S. lenders are supplementing the Fed. Bank holdings of government securities and debt of mortgage companies Fannie Mae in Washington and McLean, Virginia-based Freddie Mac totaled $1.33 trillion in the week ended July 8, the most since the Fed began compiling the figure in 1973.
Fed Support
The U.S. savings rate rose to 6.9 percent in May, the highest level since December 1993, leaving banks with funds that they can funnel to the bond market.
“Fed buying is providing support,” said Satoshi Okumoto, a general manager at Fukoku Mutual Life Insurance Co. in Tokyo, which manages about $60.8 billion in assets. “It’s a very strong sign that they want to keep interest rates low.”
If not for the Fed and U.S. lenders, Treasury yields would be rising as the government sells record amounts of debt, Okumoto said. The 10-year yield will climb to 4 percent by year- end, he said.
Treasuries gave up early advances as the MSCI World Index posted its longest stretch of gains since 2003, amid better- than-expected earnings reports from companies from Roche Holding AG to ABB Ltd.
Stock Advances
The MSCI Index, up as much as 0.2 percent today, returned almost 17 percent in the past three months on speculation the worst of the global economic recession is over. Government securities handed investors a 1.5 percent loss during the period, according to Merrill Lynch & Co.’s U.S. Treasury Master index.
Yields indicate U.S. inflation forecasts rose this year. The difference between rates on 10-year notes and Treasury Inflation Protected Securities, which reflects the outlook among traders for consumer prices, was 1.82 percentage points, widening from almost zero at the end of 2008. The spread has averaged 2.21 percentage points for the past five years.
Government securities declined yesterday as traders prepared for the government’s auction announcement. The U.S. plans to sell 20-year Treasury Inflation Protected Securities and two-, five- and seven-year securities on four consecutive days starting on July 27.
The sales will total a record $115 billion, according to Wrightson ICAP LLC, a Jersey City-based research firm that specializes in government finance. The previous record was $104 billion in two-, five-, and seven-year notes sold the week of June 22.
Libor Spread
The government more than doubled note and bond offerings to $963 billion in the first half of 2009 as it tries to end the U.S. economic recession. It may sell another $1.1 trillion by year-end, according to Barclays Plc, one of the 17 primary dealers required to bid at U.S. auctions.
Yields suggest the Fed is having mixed success in thawing credit markets that froze last year.
The London interbank offered rate, or Libor, for three- month dollar loans fell to a record 0.502 percent yesterday. Libor is about 25 basis points more than the upper end of the Fed’s target rate for overnight loans, narrowing from last year’s high of 3.32 percentage points in October.
The extra yield that three-month Libor offers over the overnight indexed swap rate, the Libor-OIS spread, was 31 basis points, near the lowest level in 18 months. A narrowing spread indicates banks are becoming more willing to lend to each other.
U.S. 30-year fixed mortgage rates rose to 5.35 percent from this year’s low of 4.85 percent in April. They were as high as 5.74 percent in June, according to Bankrate.com in North Palm Beach, Florida.
To contact the reporters on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net.
