BLBG:Treasuries Head for Weekly Gain on Demand for Haven From Europe Debt Woes
Treasuries headed for a weekly gain as the failure of European leaders to end a debt crisis in the region increased demand for the relative safety of American fixed-income securities.
U.S. five-year swap spreads widened to 47 basis points yesterday, the most since August 2009, as investors favor government bonds over higher-yielding contracts and securities. Swap spreads are headed “up and away” because Europe is becoming a risk to U.S. lenders, Bank of America Merrill Lynch said in a report.
“Treasury yields show there is still a flight to quality,” said Chungkeun Oh, a fixed-income trader in Seoul at Industrial Bank of Korea, South Korea’s largest lender to small and medium-sized companies. “Everybody is looking for some decisive action out of Europe, but so far we haven’t seen it.”
Ten-year rates held at 1.97 percent as of 1:13 p.m. in Tokyo, according to Bloomberg Bond Trader prices. The 2 percent note maturing in November 2021 changed hands at 100 9/32. The yield declined nine basis points this week.
Japan’s 10-year rate fell one basis point to 0.94 percent, matching a one-year low.
U.S. government bonds gained yesterday as borrowing costs jumped at Spanish and French bond sales. Investors questioning whether nations in the region will be able to pay their debts have driven yields up, bringing down governments in Greece and Italy and threatening the survival of the euro.
Ten-year swap spreads have increased to 19 basis points, or 0.19 percentage point, from this year’s low of five basis points in January. Investors use swaps to exchange fixed and floating interest rates. The spread, the gap between the fixed component and the yield on similar-maturity Treasuries, is a measure of bank creditworthiness.
Even Wider Spread
The figure may climb to 35 basis points, Bank of America, one of the 21 primary dealers that underwrite the U.S. debt, said in its report yesterday by Jabaz Mathai, Bin Gao and Adarsh Sinha.
The three-month London interbank offered rate has climbed to a 15-month high of 0.479 percent, according to the British Bankers’ Association.
The TED spread, the difference between what lenders and the U.S. government pay to borrow for three months, widened to 48 basis points, the most since June 2010. The spread was as much as 4.64 percentage points in October 2008 when credit markets froze and the U.S. economy was in a recession.
Treasuries snapped a four-day gain today before an industry report that economists said will show an index of leading economic indicators rose 0.6 percent in October, the most in three months.
Unattractive Yields
Ten-year yields that are about 30 basis points away from the record low are unattractive to some investors as the economy expands, according to CIBC World Markets Japan Inc.
“I don’t see that Treasuries offer good value,” said Kazuaki Oh’e, a debt salesman in Tokyo at CIBC World, a unit of Canada’s fifth-largest lender. The U.S. economy “is not too bad.” Oh’e said his customers are telling him yields are too low and they have no plans to buy, he said.
The 10-year rate will advance to 2.43 percent by the middle of 2012, according to a Bloomberg survey of banks and securities companies, with the most recent forecasts given the heaviest weightings.
Treasuries have returned 9.2 percent this year as of yesterday, according to Bank of America figures, because of the demand for safety. German bunds gained 8.4 percent and Japanese government securities handed investors a 2.1 percent gain.
The MSCI All Country World Index of stocks slid 8 percent in 2011 after accounting for reinvested dividends, according to data compiled by Bloomberg.
The Federal Reserve is scheduled to buy as much as $2.75 billion of Treasuries due from 2036 to 2041 today as part of a plan announced in September to replace $400 billion in shorter maturities with longer-term debt to cap borrowing costs.
Fed Bank of New York President William C. Dudley said there’s more the central bank could do to boost the economy, including resuming bond purchases.
If the Fed opted to buy more bonds, “it might make sense” for much of those to consist of mortgage-backed securities to boost the housing market, Dudley said yesterday in West Point, New York.
To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.
To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net
