BLBG:Treasuries Fall as Yields Damp Demand Before Auctions
Treasury 10-year yields rose from close to a record low as investors bet price gains were overdone before the U.S. sells $99 billion of coupon-bearing debt next week.
Benchmark notes headed for a ninth weekly gain, the longest streak since 1998, after Moody’s Investors Service cut the credit ratings of 16 Spanish banks, citing economic weakness and the government’s mounting budget strain, and Fitch Ratings downgraded Greece. The 10-year yield dropped earlier as Europe’s resurgent debt crisis boosted demand for the perceived safety of U.S. debt.
“There’s a little decompression in the market,” said Chris Ahrens, head interest-rate strategist in Stamford, Connecticut at UBS AG, one of the 21 primary dealers that trade with the Federal Reserve. “There’s no catalyst for a push to lower yields.”
The 10-year yield rose three basis points, or 0.03 percentage point, to 1.73 percent at 9:59 a.m. in New York, according to Bloomberg Bond Trader prices. The 1.75 percent note due in May 2022 fell 9/32, or $2.81 per $1,000 face amount, to 100 6/32.
The yield dropped to 1.6937 percent, approaching the record low 1.6714 percent set Sept. 23. It has declined 11 basis points this week.
Market Swings
The 14-day relative-strength index for 10-year notes rose to 31.6 from 25.4 yesterday, a reading suggesting the rally may be poised to loose strength. Levels above 70 or below 30 indicate the price of a security may be poised to reverse direction.
Next week’s auctions will consist of $35 billion each of two-year and five-year securities and $29 billion of seven-year notes over three days starting May 22.
“Demand may be lower,” said Kevin Yang, head of bond investment in Taipei at Hontai Life Insurance Co., which has $6 billion in assets. “They’re expensive. The economy in the U.S. is not so weak. It’s stable.” He trimmed his Treasury holdings yesterday, he said.
The U.S. economy will expand 2.3 percent this year, compared with 1.7 percent in 2011, a Bloomberg News survey of banks and securities companies shows. Euro-area gross domestic product will shrink 0.3 percent, versus last year’s 1.5 percent growth rate, according to the estimates.
Fed Views
Fed Bank of St. Louis President James Bullard said yesterday economic reports this year have been stronger than forecast and he expects the central bank to raise its target interest rate by 2013. Bullard doesn’t vote on monetary policy this year.
The Fed plans to buy as much as $5.25 billion of Treasuries due from August 2020 to May 2022 today, according to the Fed Bank of New York’s website. The purchases are part of the central bank’s program to replace $400 billion of shorter-term debt in its holdings with longer maturities by the end of June to help keep down borrowing costs.
Fed policy makers may find another round of Operation Twist is preferable to an outright asset-purchase program should the economy show further signs of weakness or if risks increase.
Chairman Ben S. Bernanke on April 25 said he was prepared to take further action to aid the economy if necessary, even as he signaled he didn’t see an immediate need to add stimulus with inflation near the Fed’s goal and unemployment falling. And the minutes from the Fed’s April meeting showed several policy makers said additional action could be necessary if the recovery slips.
Twist Options
Economists such as Nathan Sheets, Global Head of International Economics at Citigroup Inc. and Credit Suisse Securities’ Dana Saporta said the Fed’s $400 billion program to extend the maturity of bonds has been just as effective as earlier programs to expand its balance sheet, known as quantitative easing.
Yields have tumbled this week in the highest-rated debt markets. German, two-, five-, 10- and 30-year yields all dropped to records today as turmoil in Greece and Spain spurred demand for the safest government securities. Japanese government bond yields declined the lowest level since July 2003.
Moody’s cut the ratings of Spain’s biggest lenders including Banco Santander SA (SAN) and Banco Bilbao Vizcaya Argentaria SA (BBVA) yesterday. The move followed the company’s May 14 downgrade of 26 Italian banks and its Feb. 13 cut of Spain’s sovereign debt. The main drivers for the bank downgrades were a surge in soured loans, the recession, restricted funding access and the reduced ability of the government to support lenders, Moody’s said.
Yield Levels
The 10-year yield may struggle to drop below the record low 1.67 percent, said David Schnautz, a fixed-income strategist at Commerzbank AG in London. “The market being initially shy to test it right away is not too surprising. I expect rating- downgrade fears to resurface prominently. This would for sure boost U.S. Treasuries.”
Market participants are cutting their yield forecasts. The 10-year yield will be 2.48 percent by year-end, a Bloomberg survey of banks and securities companies shows. The projection declined from last month’s high of 2.58 percent.
The difference between two- and 10-year yields shrank to 1.39 percentage points yesterday, the narrowest since December 2008. The spread widened today to 1.43 percentage points.
The spread between yields on 10-year notes and similar- maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, contracted to 2.04 percentage points yesterday from this year’s high of 2.45 percentage points in March.
To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; Lucy Meakin in London at lmeakin1@bloomberg.net.
To contact the editor responsible for this story: David Liedtka at dliedtka@bloomberg.net
