BLBG:Treasury Futures Remain Higher as Gross Sees 50% Chance of Cliff
Treasury futures remained higher following a gain on Dec. 21 amid concern U.S. deficit-reduction talks will fail to avert the so-called fiscal cliff that threatens to push the economy into recession.
House Speaker John Boehner’s decision last week to scrap a plan to allow higher taxes means lawmakers won’t vote until after Christmas on the end-of-year budget issues. Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said the fiscal cliff has more than a 50 percent probability.
“I thought the fiscal cliff would be resolved much earlier,” said Satoshi Okagawa, a senior global-markets analyst in Singapore at Sumitomo Mitsui Banking Corp., a unit of Japan’s second-biggest bank by market value. “The fiscal cliff is the dominant theme for the Treasuries market now.”
Ten-year Treasury futures for March delivery traded at 132 3/8 as of 6:07 a.m. in London after climbing 10/32 to 132 15/32 on Dec. 21. The benchmark 10-year yield dropped three basis points, or 0.03 percentage point, to 1.76 percent at the end of last week.
Japan’s financial markets are shut today for a national holiday. Trading in Treasuries ends at 2 p.m. New York time today and will remain closed Dec. 25, according to the website of the Securities Industry and Financial Markets Association.
A vote on Boehner’s plan to allow higher tax rates on annual income above $1 million was canceled because it didn’t have sufficient support from his own Republican party, the House speaker said in a statement on Dec. 20.
‘50% Probability’
The Senate will reconvene Dec. 27 to discuss budget measures. The fiscal cliff refers to the more than $600 billion of tax increases and spending cuts set to take effect in January.
“The cliff is better than a 50 percent probability,” Gross, who runs the $285 billion Total Return Fund at Newport Beach, California-based Pimco, wrote in a Twitter post yesterday. A dysfunctional Washington is “bad for risk assets,” he wrote.
Treasuries have returned 2.1 percent this year on an annualized basis, set for the worst performance since a 3.7 percent decline in 2009, according to Bank of America Merrill Lynch. The Standard & Poor’s 500 Index (SPX) of U.S. shares has returned 17 percent on a similar basis, including reinvested dividends, amid signs the U.S. economy is improving.
U.S. Economy
The S&P/Case-Shiller index may show that home prices in 20 U.S. cities rose 4 percent in October from a year earlier, the fastest pace since June 2010, according to the median estimate of economists surveyed by Bloomberg News before the report, due for release Dec. 26. Consumer spending gained 0.4 percent last month from October, Commerce Department figures showed Dec. 21.
The Federal Reserve said on Dec. 12 that interest rates will remain near zero “at least as long as” the jobless rate stays above 6.5 percent and if inflation “between one and two years ahead” is no more than 2.5 percent. Central bank board members forecast the same day that the unemployment rate will fall to a range of between 6.6 and 6 percent in 2015.
“Treasuries are likely to be under pressure for the next year or so,” said Michael Turner, a fixed-income strategist in Sydney at Royal Bank of Canada. Ten-year yields at around 1.75 percent are “hard to justify if you think the Fed funds rate is going to be rising by 2015.”
To contact the reporter on this story: Masaki Kondo in Singapore at mkondo3@bloomberg.net
To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net
