BLBG:Treasury Yield Is Six Basis Points From Low Before GDP
Treasury yields were six basis points from the record low before a government report that economists said will show growth in U.S. gross domestic product slowed and inflation cooled.
Yields indicate investors are cutting bets on inflation as growth slows. The five-year, five-year forward break-even rate, a measure of expectations for prices that the Federal Reserve uses to guide monetary policy, fell to 2.39 percentage points on July 24, the least in four months and below the average of 2.75 for the past decade. Today’s GDP report may signal “danger” for the economy, said Tony Crescenzi at Pacific Investment Management Co., which runs the world’s biggest bond fund.
“Treasury bond yields will decline further,” said Hiromasa Nakamura, who invests in Treasuries in Tokyo at Mizuho Asset Management Co., which oversees the equivalent of $42 billion and is part of Japan’s third-biggest bank. “The economy is very fragile. Inflation is subdued.”
Benchmark 10-year yields were little changed from yesterday at 1.44 percent as of 6:45 a.m. in London, according to Bloomberg Bond Trader data. The all-time low was 1.38 percent set July 25. The 1.75 percent note due in May 2022 traded at 102 26/32 today.
Nakamura favors longer maturities, those that will rally most if yields fall. He switched his forecast for 10-year rates at year-end to 1 percent from 1.2 percent.
Japan’s 10-year rate increased 1 basis point to 0.74 percent today. This week it was as low as 0.72 percent, a level not seen since 2003. A basis point is 0.01 percentage point.
U.S. Growth
U.S. GDP probably expanded at a 1.4 percent annual rate in the second quarter, according to a Bloomberg News survey of economists before the Commerce Department reports the figure today. That compares with a 1.9 percent gain in the first three- month period and a 3 percent advance as 2011 came to a close.
A measure of inflation that is tied to consumer spending and strips out food and energy costs, may have climbed at a 1.8 percent annual pace, compared with 2.3 percent in the previous quarter, a separate survey shows. Fed officials have defined their inflation target as 2 percent a year.
Treasuries have returned 1.4 percent this month as of yesterday, reflecting demand for U.S. debt as a haven from slowing growth and surging yields in Europe amid that region’s sovereign crisis.
For 2012, U.S. government securities have gained 3.1 percent, versus 5.3 percent for the MSCI All-Country World Index of stocks.
Draghi’s Pledge
Treasuries fell yesterday after European Central Bank President Mario Draghi said the ECB will defend the euro, damping demand for the safest assets.
“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro,” Draghi said during a speech in London. “And believe me, it will be enough.”
Yields on Spanish debt dropped after they climbed to euro- era records earlier in the week on concern the government will need to ask for an international bailout.
“Draghi comments have the potential to be a game changer,” said Peter Jolly, the Sydney-based head of market research at National Australia Bank Ltd. (NAB) in Sydney. “Our sense is that yields are probably not justified at these levels.” Ten-year rates will climb to 2 percent by Dec. 31, he said.
The U.S. central bank plans to sell as much as $8 billion of Treasuries due from May 2015 to September 2015 today, according to the Fed Bank of New York website. The sales are part of the bank’s effort to swap short-term Treasuries in its holdings for those with longer maturities, supporting the economy by putting downward pressure on long-term borrowing costs.
‘Stall Speed’
“Most investors judge that it is going to be hard for the Fed to keep U.S. rates down forever and any good news from here could lead to a reversal,” George Goncalves, the head of rates research at Nomura Securities International Inc., wrote in a report yesterday. The company is one of the 21 primary dealers that trade directly with the Fed.
Floating-rate notes offer investors protection in case inflation quickens and the Fed raises interest rates in the years ahead, said Meg McClellan, the U.S. head of fixed income at JPMorgan Private Bank in New York.
“If you do buy five-, six-year maturity floating-rate debt and the Fed does have to move because of inflation, you’re going to get some upside from a pickup in coupon,” she said yesterday on Bloomberg Television’s “Market Makers” with Stephanie Ruhle and Scarlet Fu.
The 1.4 percent gain projected for today’s GDP report may spell trouble for the U.S. economy, said Pimco’s Crescenzi, who is based in Newport Beach, California.
“Readings below 1 1/2 percent are in danger territory because they suggest stall speed,” Crescenzi told Susan Li on Bloomberg Television’s “First Up.”
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.
