BLBG:Treasuries Advance on European Debt Crisis, U.S. Slowdown
Treasuries gained for a fifth day as Europe’s fiscal crisis and forecasts for slowing economic growth spurred demand for the relative safety of U.S. debt.
Benchmark 10-year yields were about a quarter percentage point from the record low as the Federal Reserve begins a two- day meeting today, with Chairman Ben S. Bernanke scheduled to hold a press conference tomorrow. Bernanke said March 26 that continued accommodative monetary policy is needed to bring down unemployment. The U.S. plans to sell $35 billion of two-year notes today, the same amount of five-year debt tomorrow and $29 billion of seven-year securities on April 26.
“I think yields are headed lower,” said Ali Jalai, who trades Treasuries in Singapore at Scotiabank, a unit of Bank of Nova Scotia (BNS), one of the 21 primary dealers that underwrite the U.S. debt. “The economy is just chugging along. It’s not accelerating. Problems in Europe are going to be around for a long time.”
Benchmark 10-year yields fell one basis point, or 0.01 percentage point, to 1.92 percent at 6:46 a.m. in London, according to Bloomberg Bond Trader prices. The 2 percent bond due February 2022 rose 3/32, or 94 cents per $1,000 face amount, to 100 21/32. The record low rate was 1.67 percent set Sept. 23. Thirty-year yields dropped one basis point to 3.07 percent.
Australian bonds advanced, pushing down the 10-year rate as much as 13 basis points to 3.638 percent, the lowest ever. The yield on the five-year note fell to a record 3.094 percent.
Japan’s 10-year yields rose 1 1/2 basis points to 0.925 percent after touching 0.91 percent yesterday, the lowest since October 2010.
European Politics
French President Nicolas Sarkozy lost the first round of his re-election bid, and he faces a runoff against Socialist Party challenger Francois Hollande on May 6. Hollande said yesterday that a victory by his party would “be the end of imposing austerity everywhere, austerity that brought desperation to people throughout Europe.”
A revolt against spending cuts in the Netherlands led Prime Minister Mark Rutte to offer to quit.
Scotiabank’s Jalai said he favors five- and seven-year notes because they offer more yield than shorter maturities. He said he’d become more bullish on 30-year bonds if inflation slows.
Seven-year Treasuries yield 1.06 percentage points more than two-year debt. Demand for the longer-term note has narrowed the spread from this year’s high based on closing prices of 1.38 percentage points in March. Thirty-year bonds are among the most sensitive to inflation because of their long maturity.
Junk Bonds
Morgan Stanley, JPMorgan Chase & Co. and Bank of America Corp. are recommending junk bonds as Europe’s sovereign-debt crisis flares and concern mounts over the U.S. recovery.
Morgan Stanley said last week that U.S. high-yield obligations were in a “sweet spot” as borrowers cut their debt loads. JPMorgan said junk yields will fall more than half a percentage point by year-end. Bank of America favors debentures rated in the middle tier of speculative grade.
“High yield is still providing attractive spread compensation, even adjusting for defaults relative to higher- quality credit,” said Adam Richmond, a high-yield credit strategist at New York-based Morgan Stanley.
While the extra yield investors demand to hold U.S. junk bonds rather than government debt has declined 103 basis points this year to 620 basis points, spreads are still up from last year’s low of 452 on Feb. 21, 2011, Bank of America Merrill Lynch index data show. Spreads soared to 910 basis points on Oct. 4, a two-year high, on concern the European crisis would drag the global economy into recession.
U.S. Economy
U.S. gross domestic product probably expanded at a 2.5 percent annual rate in the first quarter, according to the median forecast of 83 economists surveyed by Bloomberg News before the Commerce Department report on April 27. Growth was 3 percent in the previous three-month period.
Commerce Department figures tomorrow are likely to show a 1.7 percent decrease in March orders for durable goods, following a gain in February, according to a separate survey. New home sales probably rose in March, another poll showed before the government releases property market data today.
Ten-year yields may rise to 3 percent into year end, according to at Daiwa SB Investments Ltd., which oversees the equivalent of $61 billion, including Asia’s second-largest mutual fund. Bonds with yields less than 2 percent appear “a bit expensive,” said Kei Katayama, who invests in U.S. debt in Tokyo at Daiwa.
Fed Policy
Ten-year yields may be in a range of 2 percent to 2.5 percent with the potential to rise to 2.75 percent in 2012, according to Charles Schwab Corp., which is based in San Francisco and manages $199 billion.
“We don’t anticipate that the Fed will change policy this year and it seems unlikely at this juncture that they will engage in more quantitative easing,” Kathy A. Jones, a fixed- income strategist at the company, wrote in an e-mail.
The central bank is scheduled to buy as much as $5 billion of Treasuries due from April 2018 to February 2020 today, according to the New York Fed’s website. The purchases are part of the bank’s effort to replace $400 billion of shorter-term debt in its holdings with longer maturities to hold down borrowing costs.
U.S. central bankers bought $2.3 trillion of bonds in two rounds of so-called quantitative easing known as QE1 and QE2. They’ve also said they will probably keep their target for overnight lending between banks at almost zero at least until late 2014.
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
