BLBG:Treasuries Snap Rally Following $66 Billion of Debt Sales
Treasuries snapped a three-day advance on speculation $66 billion of note and bond sales this week have satisfied investor demand for the government debt.
Benchmark yields that are 30 basis points from the record low led investors to hunt for higher rates. Gains in Asia stocks offset concern that economic growth is slowing, helping curb demand for the safety of sovereign securities. An auction of three-year notes this week drew bids for a record 3.96 times the amount offered. At separate sales, demand increased for 10-year debt and slid for 30-year bonds.
“Investors are full of Treasuries,” said Kazuaki Oh’e, a debt salesman in Tokyo at CIBC World Markets Japan Inc., a unit of Canada’s fifth-largest lender. “The world isn’t collapsing, it’s slowing,” which will limit appetite for the safest assets, he said.
Benchmark 10-year note yields rose two basis points, or 0.02 percentage point, to 1.69 percent at 8:54 a.m. London time, based on Bloomberg Bond Trader data. The 1.625 percent security due August 2022 slipped 6/32 or $1.88 per $1,000 face amount, to 99 13/32. The record low was 1.38 percent on July 25.
The 10-year term premium, a model created by economists at the Federal Reserve that includes expectations for interest rates, growth and inflation, was negative 0.89 percent. A negative reading indicates investors are willing to accept yields below what’s considered fair value. The average for the past 10 years is 0.44 percent. The all-time low was negative 1.02 percent on July 24.
Stocks Rally
The MSCI Asia Pacific Index (MXAP) of stocks advanced 0.4 percent, poised for the first increase this week.
Thirty-year rates at 2.87 percent are 43 basis points from the record low.
Tomoya Masanao, the head of portfolio management for Japan at Pacific Investment Management Co., which runs the world’s biggest bond fund, said investors should avoid 30-year bonds with yields less than 3 percent. Masanao spoke on Oct. 10 at a conference in Tokyo.
Treasuries were still headed for a weekly gain.
“People feel uneasy about the economy,” said Akira Takei, the head of the international fixed-income department in Tokyo at Mizuho Asset Management Co., which oversees the equivalent of $42 billion and is a unit of Japan’s third-biggest publicly traded bank. “The rally is just beginning.”
Barely Safer
IMF Managing Director Christine Lagarde said the world financial system isn’t much safer than when Lehman Brothers Holdings Inc. collapsed in 2008, speaking at the International Monetary Fund meeting in Tokyo.
Some Group-of-Seven nations raised the possibility of extra fiscal measures if the global recovery weakens, Canadian Finance Minister Jim Flaherty said today, following a G-7 meeting in Tokyo yesterday.
Producer prices rose 0.8 percent in September from the month before, according to a Bloomberg News survey of economists before the Labor Department report, due at 8:30 a.m. New York time today. The increase was 1.7 percent in August.
The Thomson Reuters/University of Michigan index of consumer sentiment due at 9:55 a.m. is forecast to decline, based on responses from economists.
There are some signs of improvement in the U.S. economy, as President Barack Obama and challenger Mitt Romney prepare to face off in the Nov. 6 general election.
Labor Market
The U.S. unemployment rate slid to 7.8 percent in September from 8.1 percent the month before, the Labor Department reported on Oct. 5. Initial claims for jobless insurance fell last week, a government report showed yesterday.
The central bank is swapping shorter-term debt in its holdings for longer maturities as part of its efforts to support the economy. It plans to buy as much as $2.25 billion of Treasuries due from February 2036 to August 2042 today as part of the plan, according to the Fed Bank of New York website.
Yields indicate growing demand for debt outside the Treasury market.
The spread between two-year interest-rate swaps and same- maturity Treasury yields narrowed to 11.8 basis points, the least since March 2010 based on closing prices.
Investors use swaps to exchange fixed and floating interest-rate obligations. The spread between the fixed component and the Treasury rate is a gauge of investor demand for higher-yielding assets. The gap widens when 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.
Bonds in an index of corporate investment-grade and high- yield securities yielded 2.38 percentage points more than Treasuries, according to Bank of America Merrill Lynch data. Investor demand for company debt has narrowed the spread from 3.48 percentage points at the end of last year.
Securities in the index have returned 10 percent this year, versus 2.1 percent for Treasuries.
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.
