BLBG:Treasury Yield Close To Record Low On Europe Debt Crisis
Treasuries dropped for a second day on speculation record-low yields will curb demand as the government auctions $99 billion of coupon-bearing debt this week starting tomorrow.
Longer-maturity bonds led losses as German and French finance ministers meet today ahead of a summit of regional leaders to discuss ways to contain the debt crisis. The U.S. will start this week’s sales with $35 billion of two-year notes, followed by the same amount of five-year debt on May 23 and $29 billion of seven-year securities on May 24. Seven-year yields declined to an all-time low of 1.135 percent on May 18, raising concern U.S. bonds are becoming too costly.
“We’ve been arguing that Treasuries are expensive at these levels if you look at the macro fundamentals,” said Orlando Green, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “Yields should be higher for Treasuries but much will depend on transparency and a strong direction taken by the leaders in the euro zone.”
The 10-year yield climbed three basis points, or 0.03 percentage point, to 1.76 percent at 6:49 a.m. in New York, Bloomberg Bond Trader prices show. The 1.75 percent note due in May 2022 declined 10/32, or $3.13 per $1,000 face amount, to 99 29/32. The 30-year bond yield increased three basis points to 2.84 percent.
Germany’s Finance Minister Wolfgang Schaeuble will discuss the 17-nation currency at a meeting with his newly installed French counterpart, Pierre Moscovici, in Berlin as European Union leaders prepare for a summit May 23. Greece’s efforts to combat a recession are raising concern it will abandon the euro.
Bunds Fall
German 10-year bunds, Europe’s benchmark government securities also declined, with the yield increasing four basis points to 1.46 percent.
Treasuries returned 1.5 percent in the month ending May 18, Bank of America Merrill Lynch indexes show, reflecting demand for safer assets. Investors tracking the MSCI All-Country World Index of stocks lost 8.2 percent in the same period, including reinvested dividends.
U.S. government securities will fall later this year as economic growth quickens, according to Hiroki Shimazu, an economist in Tokyo at SMBC Nikko Securities Inc., a unit of Japan’s third-largest publicly traded bank by assets.
“The U.S. economy continues to recover,” he said.
Factory bookings for durable goods rose 0.3 percent last month after sliding a revised 3.9 percent in March, according to a Bloomberg News survey before the Commerce Department report on May 24. Other data this week will show purchases of existing and new houses increased, separate surveys predict.
Yield Forecasts
Ten-year yields will increase to 2.48 percent by year-end, according to the average forecast in a Bloomberg survey of financial companies. It declined to a record 1.67 percent on Sept. 23.
Should the yield drop to a new all-time low, it is likely to meet resistance at around 1.54 percent, which would provide a floor, David Sneddon, head of technical analysis at Credit Suisse Group AG in London, wrote today in a note to clients. Resistance refers to an area where sell orders may be clustered.
Bond traders are cutting expectations for U.S. inflation by the most since December. If their bets are accurate, Federal Reserve Chairman Ben S. Bernanke may have the scope for additional stimulus.
With six weeks left before the end of the Fed’s $400 billion swap of short-term debt for longer-term securities in a program known as Operation Twist, assets that protect against rising consumer prices and forwards measuring the outlook for inflation show diminished concerns. Traders are pricing in a 55 percent chance that the central bank will begin new efforts to spur economic growth, Bank of America Corp. says.
More Stimulus
Speculation has risen that the central bank may need to add to the $12.8 trillion already spent to avert a second recession in three years. Jobs are growing more slowly than forecast and Bernanke said April 25 that the Fed remains “prepared to do more as needed.” For first time since it announced Operation Twist in September, the Fed’s preferred gauge of measuring traders’ inflation expectations is poised to fall for a second straight month.
“It’s not only a weak economy, but as inflation comes down, it could be another reason for the Fed to implement some more stimulus,” said Gary Pollack, head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York, which manages $12 billion, in a May 14 interview.
The central bank plans to buy as much as $2 billion of Treasuries maturing from February 2036 to May 2042 today as part of its debt-swap program, according to the Fed Bank of New York’s website.
Break-Even Rate
The difference in yields between 10-year notes and Treasury Inflation Protected Securities, which represents expectations for the rate of inflation over the life of the securities, shrank to 2.04 percentage points on May 17, the narrowest since Jan. 23. It was at 2.15 percent today.
The five-year, five-year forward break-even rate, which gauges the average inflation rate between 2017 and 2022, dropped to 2.43 percent on May 16, from a 2012 high of 2.78 percent on March 19. It slid nine basis points in April, the first monthly decline since December.
Volatility on Japanese government debt was the highest in markets tracked by Bloomberg today, according to measures of 10- year bonds, two- and 10-year yield spreads and credit-default swaps. The change in Japan’s 10-year yield was 2.9 times the 90- day average.
To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
