BLBG:Treasuries Head for Weekly Advance on Recession Concern
Treasuries headed for a weekly gain as President Barack Obama’s re-election, with the houses of Congress controlled by opposing political parties, fueled concern the so-called fiscal cliff will trigger a recession.
U.S. debt returned 0.8 percent in the month ended yesterday, Bank of America Merrill Lynch indexes show. Benchmark 10-year yields fell to within a quarter percentage point of the all-time low. The MSCI All-Country World Index (MXWD) of stocks handed investors a 3.2 percent loss in the same period. The Standard & Poor’s 500 Index tumbled 3.6 percent in the past two days.
“The flight to quality will continue,” said Tokyo-based Hiromasa Nakamura, who invests in the debt at Mizuho Asset Management Co., which oversees the equivalent of $41.1 billion. “Globally, stocks are declining due to concern about the fiscal cliff. It’s supportive for the fixed-income market.”
U.S. 10-year notes yielded 1.63 percent as of 2:09 p.m. in Tokyo, Bloomberg Bond Trader data show. The 1.625 percent security due in November 2022 traded at 99 31/32. The record low yield was 1.38 percent set July 25.
For the week, the rate declined nine basis points, or 0.09 percentage point, matching the most since the period ended Sept. 28.
Ten-year yields will fall to 1.2 percent by the end of June, Nakamura said. It’s a minority view. A Bloomberg survey of banks and securities companies projects the rate will rise to 2.03 percent, with the most recent projections given the heaviest weightings.
The yield on Japan’s 2022 bond slid 1 1/2 basis points to 0.73 percent, approaching this year’s low of 0.72 percent set July 23.
Greece Concern
Greece is under pressure to rein in its budget deficit as it struggles to stay in the euro bloc, helping drive demand for the safest assets.
Treasuries interrupted the rally today as U.S. equity-index futures gained before industry and government reports economists said will show U.S. consumer confidence and wholesale inventories increased.
Standard & Poor’s 500 Index futures rose 0.4 percent, snapping a two-day decline.
“We’ve had some gyrations after the election with investors concerned about the extent of the fiscal cliff,” said Peter Jolly, the Sydney-based head of market research for National Australia Bank Ltd., the nation’s largest lender by assets. “Ultimately we expect it will be resolved, and we think we’ll see a recovery in the economy, which supports gradually higher yields.” Ten-year rates will be 2 percent at year-end, he said.
Yield Spread
The longest maturities, those most sensitive to inflation, rose most this week. The difference between 5- and 30-year yields narrowed to 2.11 percentage points yesterday, the least in two months.
The spread between rates on 10-year notes and same-maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt, was 2.44 percentage points. Consumer prices have increased at an average rate of 2.5 percent for the past decade.
The Reserve Bank of Australia reduced its 2013 growth forecast for 2013 today to a range of 2.25 percent to 3.25 percent, versus its August estimate of 2.75 percent to 3.25 percent.
China’s inflation decelerated to a 33-month low of 1.7 percent in October, the National Bureau of Statistics reported today.
Declining Volatility
Volatility waned. The Bank of America Merrill Lynch’s MOVE index, which measures price swings based on options, fell 13.2 basis points to 59.1 basis points yesterday. The was the biggest weekly decline since June.
As Obama won re-election Nov. 6, Republicans kept control of the U.S. House of Representatives and Democrats held a majority in the Senate, raising concern the two parties will have trouble agreeing on a budget that will keep the nation out of recession.
The fiscal cliff refers to more than $600 billion of tax increases and spending cuts scheduled to take effect automatically next year unless Congress acts.
Obama backs the Federal Reserve’s plan to boost the economy through bond purchases. It has bought $2.3 trillion of Treasuries and mortgage-related bonds and instituted plans to purchase $40 billion of home-loan securities a month. Challenger Mitt Romney said he wouldn’t reappoint central bank Chairman Ben S. Bernanke.
Excess Stimulus
Fed Bank of St. Louis President James Bullard said academic research suggests the central bank may be providing too much stimulus to the economy.
“The current U.S. policy stance may be substantially easier than the policy stance recommended by commonly-used monetary policy feedback rules,” Bullard said yesterday in a speech in St. Louis.
The Fed is also swapping shorter-term Treasuries in its holdings with those due in 6 to 30 years as part of its efforts to put downward pressure on long-term borrowing costs.
It plans to buy as much as $1.5 billion of Treasury Inflation Protected Securities maturing from January 2019 to February 2042 today as part of the program, according to the Fed Bank of New York’s website.
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
