BLBG:Treasuries Snap Loss On Speculation Manufacturing To Slow
Treasuries were little changed before a $35 billion five-year note auction today that is poised to draw a record-low yield, the second of three debt sales this week totaling $99 billion.
Ten-year yields were within eight basis points of a three- week low before a durable-goods orders report that economists said will show manufacturing is poised to slow. U.S. government debt returned 3.2 percent this quarter through yesterday, according to Bank of America Merrill Lynch indexes, as economic growth ebbed and European leaders struggled to resolve their fiscal crisis. The MSCI All-Country World Index of stocks handed investors an 8.9 percent loss including reinvested dividends.
“There’s not a lot of reason from a U.S. domestic macro standpoint not to like Treasuries,” said Eric Wand, a fixed- income strategist at Lloyds Banking Group Plc in London. “In this environment of uncertainty surrounding Europe, Treasuries are one of the favored destinations. That should ensure that this week’s auctions get away OK.”
The U.S. 10-year note yielded 1.63 percent at 7:01 a.m. in New York, according to Bloomberg Bond Trader prices. The 1.75 percent security due in May 2022 traded at 101 2/32. The yield dropped to 1.55 percent on June 19, the lowest since June 6.
The five-year notes being sold today yielded 0.73 percent in pre-auction trading, compared with 0.748 percent at the previous offering on May 23, which was a record low. Investors bid for 2.99 times the amount offered last month, versus 3.09 times in April.
‘Safe Haven’
“Demand is strong because Treasuries are the safe haven,” said Tsutomu Komiya, who helps oversee the equivalent of $110 billion as an investor at Daiwa Asset Management Co. in Tokyo. “The economy is improving, but the growth rate is worse than expected.”
Five-year Treasuries have returned 1.9 percent this quarter, versus 0.1 percent for two-year notes and 14 percent for 30-year bonds, the Bank of America indexes show.
The U.S. government also plans to sell $29 billion of seven-year debt tomorrow. It auctioned $35 billion of two-year securities yesterday.
U.S. orders for goods meant to last at least three years such as motor vehicles and electronic equipment rose 0.5 percent in May from April, according to economists surveyed by Bloomberg News. Orders slumped 6.6 percent in the first four months of the year, the weakest stretch since the same period in 2009, during the last recession.
A separate report today will show pending home sales increased in May, another Bloomberg survey showed.
Stockton Bankruptcy
Stockton, California, said it will file for bankruptcy after talks with bondholders and labor unions failed, making it the biggest U.S. city to seek court protection. The debt service reductions would skip paying $5.8 million owed on 2007 pension- obligation bonds and $2.6 million on 2007 variable-rate debt lease-revenue bonds for a new City Hall.
Treasury yields are too low for some investors.
“I’m waiting for a better level to buy,” said Will Tseng, who invests in U.S. debt in Taipei for Shin Kong Life Insurance Co., which has the equivalent of $52.8 billion in assets. Ten- year yields of 1.75 percent may prompt him to add to his holdings, he said.
Swap Rate
The difference between the two-year swap rate and the yield on similar-maturity U.S. debt shrank to as low as 22 basis points today, the least in 10 months, indicating demand for higher yields outside the sovereign-debt market.
Investors use swaps to exchange fixed and floating interest-rate obligations. The difference, the gap between the fixed component and the Treasury rate, is a gauge of investor demand for higher-yielding assets.
Treasuries fell yesterday, pushing 10-year yields up two basis points, or 0.02 percentage point, as European leaders prepared for a two-day meeting starting tomorrow to address the region’s debt crisis.
Hideo Shimomura, who helps oversee the equivalent of $75 billion in Tokyo as chief fund investor at Mitsubishi UFJ Asset Management Co., said yesterday he plans to delay any Treasury purchases until after the summit in case leaders produce a plan.
Volatility declined for a seventh day yesterday, according to Bank of America Merrill Lynch’s MOVE index. The gauge fell to 71.1 basis points, the lowest level in almost a month. The index measures price swings based on options.
Fed Buying
The Federal Reserve plans to buy today as much as $2.25 billion of Treasuries due from February 2036 to May 2042 today as part of its effort to spur the economy by capping borrowing costs, according to the Fed Bank of New York’s website.
The central bank last week extended its program to replace $400 billion of shorter maturity Treasuries in its holdings with longer-term debt as it strives to support the economy. Policy makers increased the measure, known as Operation Twist, by $267 billion through the end of 2012.
“The Fed’s keeping its powder dry as it’s hoping there’s a resolution to the European situation, which is even damping confidence in the U.S.,” Lloyd’s Wand said. “They are minded to apply more stimulus if they have to.”
The 10-year yield is consolidating within a range of 1.55 percent to 1.75 percent established since June 6, according to data compiled by Bloomberg.
To contact the reporter on this story: Keith Jenkins in London at kjenkins3@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
