BLBG:Treasuries Fall on Speculation Yields Are Too Low
Treasuries fell for the first time in five days on speculation European policy makers will unveil a financial bailout program for Spain as early as next week, undermining demand for the safest assets.
Ten-year yields climbed from the lowest level in a week after the Financial Times reported Spanish Economy Minister Luis de Guindos and European authorities were discussing structural measures to be included in a plan to be presented on Sept. 27, citing officials involved in discussions. Battling unemployment may mean keeping U.S. interest rates close to zero for four years, Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said.
“It looks likely that Spain and the European Union are heading closer toward agreeing a bailout and that’s eased some of the uncertainty and taken the shine off Treasuries,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh. “Kocherlakota’s comments were pretty dovish and that’s pressuring them too.”
The benchmark 10-year yield rose three basis points, or 0.03 percentage point, to 1.79 percent at 9:44 a.m. London time, according to Bloomberg Bond Trader prices. The 1.625 percent note due in August 2022 dropped 7/32, or $2.19 per $1,000 face amount, to 98 1/2. The yield fell to 1.72 percent yesterday, the lowest level since Sept. 13.
Ten-year rates will increase to 2 percent by year-end as investors seek higher-yielding assets, Stamenkovic forecast.
Spain Plan
The plan for Spain will focus on structural measures long sought by EU, not new taxes or spending cuts, though the European Commission may still request more austerity measures next month to meet existing budget targets, the Financial Times said.
The Stoxx Europe 600 Index (SXXP) advanced 0.5 percent, curbing demand for the relative safety of debt.
“Risk sentiment has improved,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. “Underlying sentiment remains quite decent. We see yields going 25-to-50 basis points higher in the next three-to-six months.”
Demand for investments outside the government debt market pushed yields on 10-year interest-rate swaps below Treasury rates yesterday, the first negative reading in two years.
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. The spread is usually positive because investors demand more yield to compensate for the risk of a swap, a transaction between banks, than they do to lend to the U.S. government.
‘Bit Bearish’
“Investors are looking for riskier assets,” said Chungkeun Oh, who buys bonds in the biggest markets for Industrial Bank of Korea (024110), South Korea’s largest lender to small- and medium-sized companies. “I’m a bit bearish” on U.S. government debt, he said.
As long as inflation doesn’t exceed 2.25 percent, the Fed “should keep the fed funds rate extraordinarily low until the unemployment rate has fallen below 5.5 percent,” from 8.1 percent now, Kocherlakota said yesterday.
Kocherlakota is hinting the Fed may be targeting 5.5 percent, Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., wrote on Twitter yesterday.
“If so, they could be at this for a long long time,” wrote Gross, who is based in Newport Beach, California.
The Fed said Sept. 13 it would buy $40 billion of mortgage- backed bonds a month to put downward pressure on borrowing costs. It pledged to keep its target for overnight loans between banks close to zero until at least the middle of 2015.
Fed Buying
The central bank is also swapping shorter-term Treasuries in its holdings with those due in six to 30 years. It plans to buy as much as $2 billion of debt maturing from November 2022 to February 2031 today as part of the program, according to Fed Bank of New York’s website.
Treasuries gained earlier this week on speculation Fed efforts to spur growth in gross domestic product will take time.
The Fed’s position is bullish for bonds because it means the economy is troubled, according to Hiromasa Nakamura, who invests in U.S. debt from Tokyo at Mizuho Asset Management Co., which oversees the equivalent of $42 billion.
“Treasuries will be the best bond market,” he said. Mizuho prefers 10-year and 30-year securities, those that rise most in price if yields fall, he said.
To contact the reporters on this story: Emma Charlton in London at echarlton1@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net
