BLBG:Treasuries Snap Four-Day Gain on Speculation Consumer Confidence Increased
Treasuries ended a four-day gain before an industry report forecast to show U.S. consumer confidence rebounded this month from a decline in January.
This will be a “lousy year” for the debt, according to Wells Capital Management Inc., a unit of the biggest U.S. bank by market value. Treasuries handed investors a 0.5 percent loss in February as of yesterday, according to Bank of America Merrill Lynch data, while the Standard & Poor’s 500 Index returned 4.4 percent. Traders increased bets on inflation for a second straight month, yields show.
“Treasuries will sell off,” said Kei Katayama, a bond manager at Daiwa SB Investments Ltd., which has the equivalent of $61.7 billion in assets and is part of Japan’s second-largest brokerage. “My main scenario is one of gradual inflation” in the U.S. economy, he said. Katayama said he favors shorter maturities, those that will fall less in price if rates climb.
Ten-year yields rose one basis point to 1.94 percent as of 2:48 p.m. in Tokyo, according to Bloomberg Bond Trader prices. The 2 percent security maturing in February 2022 declined 3/32, or 94 cents per $1,000 face amount, to 100 18/32.
Japan’s 10-year rate fell 1/2 basis point to 0.96 percent. This year’s low was 0.935 percent set Jan. 16.
The Conference Board’s U.S. consumer confidence index probably climbed to 63 this month, according to a Bloomberg News survey of economists. It fell to 61.1 in January from 64.8 in December. Orders for U.S. durable goods declined in January, another Bloomberg survey indicated before a separate report.
More Americans than forecast signed contracts to buy previously owned homes in January, according to a report yesterday, indicating the industry that sparked the last recession is improving.
Wells Capital’s Strategy
The growing U.S. economy will hurt bonds and support stocks, James W. Paulsen, the Minneapolis-based chief investment strategist for Wells Capital, wrote in a report that the company distributed yesterday. Ten-year yields may climb to 3.5 percent in 2012, according to the report.
An increase to that level by Dec. 31 would bring a 9.2 percent loss to an investor who bought today, according to data compiled by Bloomberg.
“This will prove a lousy year for high-quality bonds,” Paulsen wrote in the report. “We expect the same renewed confidence which has been pushing the stock market higher this year to also begin pushing bond yields higher.”
Treasuries rose yesterday after the Group of 20 nations rebuffed German-led calls for financial support to contain Europe’s sovereign-debt crisis. Investors had sought the relative safety of U.S. debt even as Germany’s lower house of parliament approved a second euro-region Greek bailout package worth 130 billion euros ($174 billion).
Yield Spreads
Nobel-prize winning economist Paul Krugman said Greece is close to having no option but to quit the euro as austerity measures imposed on the nation hamper its economic recovery, speaking in Lisbon yesterday.
Demand for the haven of U.S. debt has kept 10-year yields within about a quarter percentage point of the record low. They are almost 2 percentage points less than the 10-year average.
“Whenever you think the market will go to higher yields, something new comes out of Europe,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors.
Fed Purchases
The U.S. central bank is replacing $400 billion of shorter- maturity Treasuries in its holdings with longer-term debt to cap long-term borrowing costs under a program it plans to conclude in June. It plans to buy as much as $5 billion of notes due from May 2020 to February 2022 today as part of the plan, according to the Fed Bank of New York website.
The difference between the yields on 2- and 10-year notes narrowed to 1.64 percentage points yesterday, the lowest on a closing basis since Feb. 2.
An index of U.S. corporate investment-grade and high-yield bonds rallied 1 percent this month, the Bank of America figures show. The gauge yielded 2.87 percentage points more than Treasuries, narrowing from 3.43 percentage points at the start of the year.
The spread 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, widened 16 basis points in February to 2.26 percentage points. It advanced 15 basis points, or 0.15 percentage point, in January.
Consumer prices increased 2.9 percent in January from the year before, the Labor Department reported Feb. 17.
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
