BLBG: Treasuries Gain as Surge in Yield Presents Buying Opportunity
By Wes Goodman
March 25 (Bloomberg) -- Treasuries rose, rebounding from their biggest decline in nine months, on speculation the U.S. economy isn’t growing fast enough to justify yields near the highest level this year.
The selloff is an opportunity to add to holdings, Daiwa Securities Capital Markets Co. said. Bonds tumbled yesterday after investors demanded a higher yield than dealers predicted at a $42 billion five-year note auction. The Treasury is scheduled to sell $32 billion of seven-year debt today, the last of three note auctions this week totaling $118 billion.
“It’ll be a good time to buy” as prices stabilize, said Yasutoshi Nagai, chief economist at Daiwa Securities in Tokyo. “High unemployment will continue. The U.S. economic condition is not good.” The company is part of Daiwa Securities Group Inc., Japan’s second-largest brokerage after Nomura Holdings Inc.
The yield on the benchmark 10-year note fell three basis points to 3.82 percent as of 2:12 p.m. in Tokyo, according to BGCantor Market Data. The 3.625 percent security due February 2020 rose 1/4, or $2.50 per $1,000 face amount, to 98 3/8.
The jobless rate held at 9.7 percent in March, near the 26- year high of 10.1 percent set in October, according to a Bloomberg News survey of economists before the Labor Department reports the figure on April 2.
The Federal Reserve on March 16 repeated its pledge to keep interest rates low for an “extended period,” citing “high unemployment.”
Treasuries ‘Slaughtered’
Ten-year yields surged 17 basis points yesterday, the biggest increase since June 4.
“Treasuries got slaughtered,” said Andy Cossor, Hong Kong-based chief market strategist for Asia at DZ Bank AG, Germany’s fifth-largest lender. Ten-year yields will climb to 4.60 percent by year-end, he said.
Yesterday’s auction drew a yield of 2.605 percent, compared with the average forecast of 2.556 percent in a survey of eight of the Fed’s primary dealers. The difference of 4.9 basis points was the largest since July, based on Bloomberg surveys.
Investors bid for 2.55 times the amount on offer, the lowest level since September.
Demand from the group of investors that includes foreign central banks was the least in eight months, raising speculation China cut its purchases.
China’s Demand
The decline in so-called indirect bids came as U.S. lawmakers resumed efforts to force China to allow the value of its currency, the yuan, to appreciate. Senator Charles Schumer, a New York Democrat, said on March 23 that he will seek to pass legislation before the end of May that would push China to raise the yuan’s value.
“I would not be surprised if the low indirect bid had something to do with the Chinese sitting on their hands,” said Joseph Brusuelas, a strategist at Brusuelas Analytics in Stamford, Connecticut.
China is America’s largest creditor, holding $889 billion of the nation’s $7.4 trillion of marketable debt, according to Treasury Department figures.
The seven-year notes being sold today yielded 3.33 percent in pre-auction trading, rising from 3.078 percent at the previous sale of the securities on Feb. 25.
Investors bid for 2.98 times the amount on offer last month, compared with an average of 2.72 for the past 10 auctions. Indirect bidders purchased 40.3 percent of the securities, versus the 10-sale average of 54.4 percent.
Direct bidders, non-primary dealers buying for their own accounts, purchased 17.2 percent of the securities. It was the most since the U.S. revived sales of the notes in February 2009.
Swap Spreads
U.S. interest-rate swap spreads plunged to the lowest levels in more than two decades after Fitch Ratings’ downgrade of Portugal yesterday raised the risk of owning sovereign debt.
“The momentum is to higher yields,” said Aaron Kohli, an interest-rate strategist in Stamford at Royal Bank of Scotland Group Plc, one of 18 primary dealers obligated to bid at Treasury auctions. “It’s not the auction that started the trend, it was the swap spreads. But the auction kept it going.”
The gap between the rate to exchange floating- for fixed- interest payments and comparable-maturity Treasury yields for 10 years shrank to negative 10 basis points yesterday, the narrowest since at least 1988, when Bloomberg began collecting the data.
Samsung Investment Trust Management, South Korea’s largest investor, is among the Treasury bulls. The U.S. housing and labor markets will be slow to recover, sending 10-year yields down to 3 percent by year-end, said Sungjin Park, the company’s head of fixed income. New home sales fell to the lowest level on record in February, a government report showed yesterday.
“This year will be bullish for the fixed-income markets and bearish for risk assets like equities,” said Park, who oversees the equivalent of $55.4 billion of debt for the company is Seoul.
To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.
