BLBG:Treasuries Snap Advance on Speculation New-Home Sales Gai
Treasuries snapped a three-day gain before a U.S. report that economists said will show new home purchases climbed to the highest level in more than a year as the housing market stabilizes.
Rising yields are the result of improvement in the U.S. economy and a recognition that the Federal Reserve will “normalize” monetary policy, according to UBS AG, one of the 21 primary dealers that trade with the central bank. Fed Bank of St. Louis President James Bullard said the best time for the central bank to raise interest rates may be late 2013, a year earlier than currently planned. Benchmark 10-year yields climbed to 2.4 percent on March 20, the highest level since October.
“Investors will likely buy corporate bonds and stocks and get out of the Treasury market,” said Kazuaki Oh’e, a debt salesman in Tokyo at CIBC World Markets Japan Inc., a unit of Canada’s fifth-largest lender. “The U.S. economy is recovering.”
Ten-year rates rose one basis point, or 0.01 percentage point, to 2.29 percent as of 2:53 p.m. in Tokyo, according to Bloomberg Bond Trader prices. The price of the 2 percent security due in February 2022 fell 2/32, or 63 cents per $1,000 face amount, to 97 15/32.
Japan’s 10-year yields were unchanged today at 1.025 percent.
Treasuries have declined 1.6 percent this year through yesterday, while Japan’s government bonds were little changed, according to Bank of America Merrill Lynch data.
An index of U.S. investment-grade and high-yield corporate debt gained 2.7 percent, the Bank of America figures show. The Standard & Poor’s 500 Index (SPX) of shares returned 11 percent during the period after accounting for reinvested dividends, according to data compiled by Bloomberg.
‘Healthy Development’
Sales of U.S. new homes probably climbed 1.3 percent in February from January to a 325,000 annual pace, the fastest since December 2010, according to the median estimate in a Bloomberg News survey of economists before the Commerce Department report today.
“We regard the trend toward higher yields as a healthy development,” Andrew Cates in Singapore and Larry Hatheway and Christine Li in London wrote in the UBS report yesterday. “It reflects a healing process in the U.S. economy and recognition that the Fed will be able to normalize monetary policy earlier than many envisage.”
The central bank repeated its view on March 13 that economic conditions will probably lead it to keep the benchmark interest rate close to zero at least through late 2014.
Signs of Weakness
Ten-year Treasuries gained for three straight days this week as some investors said they saw signs of weakness in the biggest economies.
“The rise in yields is temporary,” said Hiromasa Nakamura, who invests in Treasuries at Mizuho Asset Management Co. in Tokyo, which has the equivalent of $39.7 billion in assets and is a unit of Japan’s second-largest bank. “The unemployment and housing situations are very fragile” in the U.S.
Mizuho Asset favors Treasuries due in more than 10 years, the longest maturities that will rise most if yields fall, Nakamura said. Investors at the company predicted last year’s Treasury rally.
Home prices in 20 U.S. cities dropped 4 percent in December from a year earlier, the 15th straight month of declines, according to S&P/Case-Shiller. The jobless rate was 8.3 percent in January and February, versus the average of 6 percent for the past 20 years, Labor Department data showed.
Europe, China Manufacturing
Treasuries gained yesterday after reports indicated euro- region output contracted and China’s manufacturing weakened, boosting the refuge appeal of U.S. government bonds.
Investors should favor two-year notes, Ajay Rajadhyaksha and Dean Maki, New York-based analysts at Barclays Capital Inc., wrote in a report yesterday.
“We consider the recent rise in Fed hike expectations premature,” according to Barclays, another primary dealer. Two- year notes tend to track what the Fed does with its target for overnight bank lending because of their short maturity.
Policy makers have kept the target in a range of zero to 0.25 percent since December 2008. Two-year notes yield 11 basis points more than the upper end of the band. The spread was 14 basis points on March 20, rising past the five-year average of 13 basis points.
The central bank is due to buy as much as $2.25 billion of Treasuries due from 2036 to 2042 today as part of its plan to keep borrowing costs down, according to the New York Fed website.
‘Turning Point’
Officials are debating what to do next.
With policy currently “on pause, it may be a good time to take stock of whether we may be at a turning point,” Bullard said in a speech in Hong Kong today. “As the U.S. economy continues to rebound and repair,” further action “may create an overcommitment to ultra-easy monetary policy.”
Fed of Chicago President Charles Evans said the central bank needs to further ease monetary policy to fuel the U.S. economic expansion, in a speech yesterday in Washington. Bullard and Evans don’t vote on monetary policy this year.
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
