BLBG:Treasuries Hold Gain Before Report on Durable Goods
Treasuries held a five-day rally as economists said reports on durable goods orders and consumer spending in coming days will show the economy is slowing, while the so-called fiscal cliff threatens the expansion.
U.S. investors are buying Treasuries at a faster pace than foreigners for the first time since 2010, government figures show. The fiscal cliff, $600 billion of tax and spending cuts scheduled for 2013, is threatening growth and maintaining demand for government securities even with benchmark 10-year yields 36 basis points away from the record low.
“We are buying bonds,” said Hans Goetti, Singapore-based chief investment officer for Asia at Finaport Investment Intelligence, which manages the equivalent of $1.5 billion. “You have these tax cuts expiring at the end of the year, and you will have a massive hit to” gross domestic product.
Ten-year yields were little changed at 1.74 percent as of 7:01 a.m. in London, according to Bloomberg Bond Trader data. The price of the 1.625 percent security due in August 2022 rose 3/32, or 94 cents per $1,000 face amount, to 98 30/32.
A sixth gain today would be the longest advance since May 2011. The all-time low yield was 1.38 percent on July 25.
Japan’s 10-year rate slid one basis point, or 0.01 percentage point, to 0.79 percent today. It has been in a range of 0.775 percent to 0.835 percent this month.
U.S. Data
Durable goods orders, a measure of demand for equipment and machinery, probably dropped 5 percent in August after rising 4.1 percent the prior month, according to the median estimate of economists surveyed by Bloomberg News before the Sept. 27 report from the Commerce Department.
Household purchases, which account for about 70 percent of the economy, may have risen 0.5 percent last month after a 0.4 percent increase in July, according to the median estimate of economists surveyed ahead of Sept. 28 figures from the Commerce Department. The report may show the gain reflected a 0.5 percent jump in prices, the biggest since June 2009.
The Treasury Department is scheduled to sell $35 billion of two-year notes tomorrow, the same amount of five-year debt the next day and $29 billion of seven-year securities Sept. 27. The U.S. issues this combination of securities every month.
Government debt securities held by domestic buyers, excluding the Federal Reserve, rose 10.7 percent in the first seven months of this year to $3.61 trillion, compared with a 6.9 percent increase for countries from China to Germany, according to the latest data available from the Treasury Department and compiled by Bloomberg.
Foreign purchases grew 13 percent last year, while U.S. holdings fell 4.6 percent.
Finaport Outlook
Finaport’s Goetti said he’s bullish on Treasuries because the Federal Reserve may increase its purchases of government bonds as it tries to support the economy. Central bank efforts to spur growth will buoy high-yield bonds, he said.
Treasuries have returned 1.7 percent this year as of yesterday, versus 13 percent for high-yield bonds, according to Bank of America Merrill Lynch indexes.
The MSCI All-Country World Index (MXWD) of shares handed investors a 15 percent gain including reinvested dividends, according to data compiled by Bloomberg.
An index of U.S. high-yield company debt pays 2.42 percentage points more than Treasuries, according to according to Bank of America Merrill Lynch. Investor demand for the corporate securities has narrowed the difference from 3.48 percentage points at the end of last year.
Fed Purchases
The Fed said Sept. 13 it will buy $40 billion of mortgage- backed bonds a month to put downward pressure on borrowing costs.
The move has helped drive down the cost of buying a home. The average rate on a 30-year fixed mortgage matched a record low 3.49 percent in the week ended Sept. 20, according to McLean, Virginia-based Freddie Mac.
Policy makers pledged to keep their target for overnight loans between banks close to zero until at least the middle of 2015.
The central bank is also swapping shorter-term Treasuries in its holdings with those due in 6 to 30 years. It plans to buy as much as $2 billion of debt maturing from February 2036 to August 2042 today as part of the program, according to Fed Bank of New York’s website.
“People are waiting to see if the economy is picking up,” said Tomohisa Fujiki, an interest-rate strategist in Tokyo at BNP Paribas SA, whose New York unit is one of the 21 primary dealers obliged to bid at U.S. debt sales. “They want to confirm the numbers before selling Treasuries.” Yields will probably rise by year-end as the economy expands, he said.
Ten-year yields will increase to 1.80 percent by Dec. 31, according to the average forecast in a Bloomberg survey of financial companies with the most recent projections given the heaviest weightings.
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
