BLBG:Treasuries Gain As Central Bankers Strive To Cut Rates
Treasuries rose after China cut interest rates, bolstering expectations central bankers around the world will work to keep borrowing costs down as they try to counter slowing economic growth.
Benchmark 10-year yields were 17 basis points from the record low after China reduced its benchmark one-year lending rate to 6.31 percent from 6.56 percent. Federal Reserve Chairman Ben S. Bernanke said yesterday the U.S. central bank has options for further easing. Australia cut borrowing costs on June 5, and European Central Bank President Mario Draghi said June 6 he’s ready to add stimulus if necessary.
“It looks like coordinated action,” said Hiromasa Nakamura, who helps oversee the equivalent of $41.9 billion as an investor for Mizuho Asset Management Co. in Tokyo. “It’s positive for Treasuries.” Yields will decline later in the year to break the record low set last week, he said.
The 10-year yield declined four basis points, or 0.04 percentage point, to 1.60 percent as of 7:06 a.m. in London, Bloomberg Bond Trader data show. It reached 1.44 percent on June 1, the least ever. The 1.75 percent note due in May 2022 advanced 11/32, or $3.44 per $1,000 face amount, to 101 11/32.
An index of Treasuries due in more than a year returned 1.3 percent in the past month, the most among 26 sovereign debt markets tracked by Bloomberg and the European Federation of Financial Analysts Societies, after accounting for currency changes.
Japan’s 10-year rate slid three basis points to 0.85 percent today. It was as low as 0.79 percent on June 4, a level not seen since 2003.
Global Rate Policy
World economic growth will probably slow to 2.55 percent in 2012 from 2.89 percent in 2011, a Bloomberg News survey of banks and securities companies shows. Europe’s debt crisis and U.S. jobs growth that fell short of economists’ forecasts helped drive demand for the relative safety of America’s debt.
China will give banks extra freedom to set the amounts they pay on deposits and charge for loans. Australia cut its benchmark interest rate to 3.5 percent from 3.75 percent.
The ECB, Bank of England and the Fed have been buying debt. Rate cuts make a bond’s fixed payments more valuable, while the purchases reduce the supply of securities.
The Fed is replacing $400 billion of shorter-term debt in its holdings with longer maturities by the end of this month to support the economy by keeping down borrowing costs. It plans to buy as much as $2.25 billion of Treasuries due from February 2036 to May 2042 today as part of the program, according to the Fed Bank of New York’s website.
Euro Crisis
U.S. policy makers will probably extend and modify the program, Ward McCarthy, the chief financial economist at Jefferies & Co., told Pimm Fox yesterday on Bloomberg Television’s “Taking Stock.” The central bank will probably buy $300 billion of mortgage-backed securities and $115 billion of 30-year bonds in the second version of the program, according to Jefferies, one of the 21 primary dealers that trade directly with the Fed. U.S. central bankers meet on June 19 and June 20.
A valuation measure showed Treasuries are at almost the most expensive level ever, just as the U.S. prepared to sell $66 billion in notes and bonds next week.
Term Premium
The term premium, a model created by economists at the Fed, was at negative 0.85 percent after closing on June 1 at negative 0.94 percent, the record. The average over the past year is negative 0.44. A negative reading indicates investors are willing to accept yields below what’s considered fair value.
“I’m skeptical of buying U.S. Treasury bonds,” said Youngsung Kim, the head of fixed income in Seoul at Samsung Asset Management Co., South Korea’s largest private bond investor with the equivalent of $96.7 billion in assets. “Even though yields have rebounded, they’re pretty low.”
Japanese investors sold a net 2.86 trillion yen ($36.1 billion) in long-term U.S. Treasuries during April, the Ministry of Finance reported today, the most based on MOF data since 2005.
Efforts to help European Union governments pay their debts may send Treasury yields higher, George Goncalves, the head of interest-rate strategy at Nomura Securities International Inc. in New York, wrote in a report yesterday.
“Even with another Fed program in place, all the markets can wish for is that they restrain the backup in yields once there is a rolling out of EU solutions,” according to Nomura, another primary dealer.
Officials from the Group of Seven nations said they will work together to help both Spain and Greece place their public finances on a sustainable footing, Japanese Finance Minister Jun Azumi told reporters in Tokyo following a conference call among the members June 5.
Treasury 30-year bonds, among the most sensitive to inflation because of their long maturity, are outperforming the rest of the market over the past month. They have returned 6.4 percent in the period, versus 2.4 percent for 10-year notes, according to Bank of America Merrill Lynch indexes.
The difference between yields on 10-year notes and 30-year bonds was 1.10 percentage points, versus the average over the past 12 months of 1.15 percentage points.
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
