SF: U.S. 2-Year Note Yield Is Near Record Low After Home Sales Data
July 26 (Bloomberg) -- Treasury two-year note yields were near a record low as government data showed sales of U.S. new homes rose in June more than forecast following an unprecedented collapse the prior month.
Two-year yields were within six basis points of their least ever even as the government prepared to sell $104 billion in notes this week. Treasuries declined on July 23 after stress tests showed just seven of 91 European banks examined needed more capital.
"Housing is still one of the most critical economic issues we are facing," Thomas L. di Galoma, head of U.S. rates trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors, said before the report. "The market is probably a little bit rich given where supply will be coming."
The yield on the benchmark 10-year note less than 2 basis points, or 0.092 percentage point, to 3.01 percent at 10:10 a.m. in New York, according to BGCantor Market Data. The two-year yield rose 2 basis points to 0.61 percent. It touched 0.5516 percent on July 23.
Purchases of new homes increased 24 percent from May to an annual pace of 330,000, figures from the Commerce Department showed today in Washington. The rate was the second-lowest in data that goes back to 1963 after May's downwardly revised 267,000 pace.
Signs of Slowing
The 10-year yield has dropped more than one percentage point since its 2010 high of 4.01 percent on April 5 as signs the economy is slowing boosted demand for the safest fixed- income assets. Some investors and analysts said they are concerned that the recovery will falter more than a year after President Barack Obama signed the $787 billion stimulus package and the Fed cut its target interest rate for overnight loans between banks to a range of zero to 0.25 percent.
"Post-crisis headwinds will restrain trend growth in world gross domestic product by 1 to 1.5 percentage points," said Stephen Roach, non-executive chairman of Morgan Stanley Asia.
A confidence measure will also show Americans grew more pessimistic about the economy. The Conference Board's consumer confidence gauge dropped to 51 from 52.9, a separate survey showed ahead of the July 27 report.
Gross domestic product growth probably slowed to 2.5 percent in the second quarter from 2.7 percent in the first, a separate survey showed before the government reports the figure on July 30.
"U.S. data should be on the soft side, offering support to Treasuries," a team of analysts at UniCredit SpA led by Michael Rottman in Munich wrote today in a research note. "Investors should view the stress-test results with some caution."
Stress Tests
The seven European Union banks that failed Europe's stress tests had a combined capital shortfall of 3.5 billion euros ($4.5 billion), according to the Committee of European Banking Supervisors, which coordinated the initiative. The study scrutinized lenders assuming losses of 23.1 percent for Greek debt, 12.3 percent on Spanish bonds and a 20 percent slump in European equities in both 2010 and 2011. The capital-provisions findings, about a tenth of the lowest analyst estimate, left doubts about whether regulators were tough enough.
Still, U.S. debt securities are outperforming German bunds, Europe's benchmark government bonds, as European data points to faster growth than in the U.S. The extra yield investors demand to hold 10-year Treasuries narrowed two basis points to 27 basis points. The spread was as much as 90 basis points on April 5.
Last week, a German report showed an index of business confidence jumped to a three-year high, while British reports on gross domestic product and retail sales beat analysts' estimates."
'De-Coupling' of Data
"The de-coupling on the data front between the U.S. and the euro zone, especially Germany, has become more distinct," Nomura Holdings Inc. strategists in London led by Nick Firoozye wrote in an e-mailed note today. That's inspiring Treasury outperformance and "the underlying forces driving have some degree of momentum to them, suggesting that the pattern has scope to extend further," the analysts wrote.
The combination of record-low yields on two-year notes, 10- year rates below 3 percent and a deficit projected to surpass $1.4 trillion for a second consecutive year is a signal that the bond market is less concerned with government spending than with getting the economy back on track.
'Granted More Time'
"The U.S. has been granted more time," said Anthony Crescenzi, a portfolio manager and strategist in Newport Beach, California, at Pacific Investment Management Co., which oversees more than $1 trillion in assets. "Because of the concerns in Europe, money has flowed to the U.S., and so it does allow the U.S. to play the game for longer, and kick the can down the road on deficit reduction."
Futures on the CME Group Inc. exchange showed a 33 percent chance policy makers will boost the target lending rate for overnight bank loans at least a quarter-percentage point by April, compared with a 55 percent likelihood a month ago.
The $104 billion of notes the U.S. will sell this week is the lowest amount of the securities auctioned since June 2009. The Treasury is to sell $38 billion in two-year notes tomorrow, $37 billion of five-year debt the following day and $29 billion in seven-year securities July 29.
--With assistance from Wes Goodman in Singapore. Editors: Greg Storey, Paul Cox
