BLBG:Treasuries Hold Advance Before Sarkozy, Merkel Meet on Europe Debt Crisis
Treasuries held gains before German and French leaders meet to work on a fiscal plan as they tackle a debt crisis that’s hurting Europe’s economic growth.
Demand for America’s sovereign debt as a haven has pushed securities due in 10 years and longer up 30 percent in the past 12 months, the most among 144 government-bond indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Treasuries rose at the end of last week even after a U.S. report Jan. 6 showed the nation added more jobs than economists expected.
“You have the ongoing flight to quality given Europe’s problems,” said Peter Jolly, the Sydney-based head of market research at National Australia Bank Ltd., the Pacific nation’s largest lender as measured by assets. “Jobs growth was pretty solid but inflation isn’t a threat. Those factors will suppress yields.”
U.S. 10-year notes yielded 1.97 percent as of 7:19 a.m. in London, according to Bloomberg Bond Trader prices. The 2 percent security maturing in November 2021 changed hands at 100 10/32. The yield slid four basis points on Jan. 6.
German Chancellor Angela Merkel and French President Nicolas Sarkozy will meet in Berlin today to set rules on government spending for the 17-nation euro area. “Europe is on the brink of a recession,” Luxembourg Prime Minister Jean- Claude Juncker said last week.
Improving Labor Market
The U.S. added 200,000 jobs in December, the Labor Department reported. Economists expected 155,000, based on a Bloomberg News survey of banks and securities companies. The unemployment rate fell to 8.5 percent, the lowest since February 2009.
The difference (USGGBE10) between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, has narrowed to 2.08 percentage points from 2.35 percentage points 12 months ago. The 10-year average is 2.13 percentage points.
Yields will probably rise in 2012 as European governments address the debt crisis and as the U.S. economy improves, said Roger Bridges at Tyndall Investment Management Ltd in Sydney.
“The U.S. economy is looking relatively good,” said Bridges, who oversees the equivalent of $15.3 billion of debt at the unit of Japan’s Nikko Asset Management Co. “Yields are sitting on the bottom” of 2012’s range, he said.
Retail Sales Increase
Sales (RSTAMOM) at U.S. retailers probably rose 0.3 percent in December, after a 0.2 percent advance in November, according to the median (RSTAMOM) forecast of 56 economists surveyed by Bloomberg News ahead of Commerce Department figures on Jan. 12.
The Thomson Reuters/University of Michigan preliminary consumer confidence gauge for January probably rose to a seven- month high, a separate survey shows before the Jan. 13 report.
The Federal Reserve is replacing $400 billion of shorter- maturity Treasuries in its holdings with longer-term debt to cap borrowing costs and foster economic growth, in a plan it announced in September. The central bank is scheduled to sell as much as $8.75 billion of notes due from April to September this year today as part of the program, according to the New York Fed’s website.
Bearish on Treasuries
Investors in a weekly survey by Ried Thunberg ICAP, a unit of the world’s largest interdealer broker, held to their bearish stance on Treasuries. Ried’s index on the market outlook through June rose to 45 for the seven days ended Jan. 6 from 44 a week earlier. A figure below 50 shows investors expect Treasuries to decline.
The U.S. is scheduled to sell $32 billion of three-year notes tomorrow, $21 billion of 10-year securities the following day and $13 billion of 30-year bonds on Jan. 12. The amounts are the same as the previous auctions in December.
Economists, emboldened by gains in everything from U.S. manufacturing to consumer confidence and jobs, are advising clients to get out of Treasuries. Traders aren’t so eager to give them up.
Benchmark 10-year yields will climb to 2.6 percent by Dec. 31 from 1.88 percent last year as growth accelerates, according to the median estimate of 63 economists and strategists surveyed by Bloomberg. Traders aren’t as optimistic, expecting an increase to 2.25 percent, based on forwards that use current trading levels to predict future rates.
The divergence shows traders see Europe’s debt crisis continuing to stoke demand for safety and containing yields even as the economy improves. Predictions last year by both groups for a selloff proved wrong as Treasuries due 10 years or more returned the most since 1995, even as President Barack Obama increased publicly traded debt (DEBPMARK) outstanding to a record $9.88 trillion and Standard & Poor’s stripped the U.S. of its AAA rating on Aug. 5.
To contact the editor responsible for this story: Garfield Reynolds at greynolds1@bloomberg.net
