BLBG:Treasuries Rise as China Credit Squeeze Boosts Demand for Safety
Treasuries rose, with 10-year notes halting a six-day decline, as investors sought safer assets amid speculation a credit squeeze in China will slow growth in the world’s second-biggest economy.
Benchmark yields fell from the highest level since 2011 as China’s main stock index extended its drop after entering a bear market. China’s overnight repurchase rate jumped to a record 12.85 percent on June 20 and was at 6 percent today, almost twice the average for this year. The U.S. is scheduled to sell $99 billion in notes this week. Bond markets round the world have slumped since Federal Reserve Chairman Ben S. Bernanke said last week policy makers may end stimulus in mid-2014.
“Markets still have not quite realized what the tapering of bond purchases by the Fed means, that this does not mean a reduction of central-bank liquidity but just an end to the continuous adding of liquidity,” said Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich. “Beyond the Fed policy topic you will also be chiefly looking at growth woes in Asia and China as another factor that would argue for lower yields.”
The U.S. 10-year yield dropped one basis point, or 0.01 percentage point, to 2.53 percent at 7 a.m. New York time after rising to 2.66 percent yesterday, the highest level since August 2011. The 1.75 percent note due in May 2023 gained 3/32, or 94 cents per $1,000 face amount, to 93 1/4.
The rate should decline to between 2.10 percent and 2.30 percent over the next three months, Daheim forecasts.
Technical Indicator
A technical gauge signaled that the increase in Treasury yields was too rapid. The 14-day relative-strength index for 10-year yields climbed to 78 yesterday, exceeding the 70 level that signals they were set to change direction.
Government securities in Germany and the U.K. also advanced. Germany’s 10-year yield declined two basis points to 1.79 percent and the U.K.’s dropped five basis points to 2.49 percent.
Goldman Sachs Group Inc. and Barclays Plc are among banks that have pared their 2013 growth projections for China to 7.4 percent, below the government’s 7.5 percent goal. The CSI 300 Index (SHSZ300) of shares has tumbled 22 percent from this year’s highest close on Feb. 6.
The MSCI All-Country World Index of shares slid 5.5 percent this month, including reinvested dividends. Treasuries handed investors a loss of 1.9 percent during the period, according to the Bloomberg U.S. Treasury Bond Index (BUSY), as Bernanke said June 19 the central bank may start reducing its quantitative-easing program this year and end it in mid-2014.
Fed Purchases
“China’s credit squeeze may have more severe repercussions for the global economy” than the bankruptcy of Lehman Brothers Holdings Inc. in 2008, said Akira Takei, who helps oversee the equivalent of $34 billion as head of the international fixed-income department at Mizuho Asset Management Co. in Tokyo. “This isn’t a good time to sell Treasuries.”
The Fed has been buying $40 billion of mortgage-backed securities and $45 billion of U.S. government debt each month to put downward pressure on borrowing costs. The central bank will cut its monthly bond purchases to $65 billion at its Sept. 17-18 policy meeting, according to 44 percent of 54 economists surveyed by Bloomberg after Bernanke’s June 19 press conference.
Treasury 10-year yields will increase to betweeen 3 percent and 3.75 percent next year, according to Bob Parker, who helps oversee about $400 billion in London as senior adviser at Credit Suisse Asset Management. He spoke at the Euromoney Global Borrowers and Investors Forum in London today.
Home Values
The S&P/Case-Shiller index of home values for 20 U.S. cities climbed 10.6 percent for the year ended April after a 10.9 percent gain in March that was the most since 2006, according to a Bloomberg News survey before today’s report. Durable goods orders rose 3 percent in May after gaining a revised 3.5 percent the previous month, a separate survey shows.
Two Fed presidents who differ over the need for more stimulus emphasized that the central bank’s monetary policy remains accommodative.
“What we’re talking about here is dialing back,” Richard Fisher, president of the Fed Bank of Dallas, said in London yesterday. “The word ‘exit’ is not appropriate here,” said Fisher, who doesn’t vote on policy this year and has been critical of the Fed’s easing policies.
Minneapolis Fed President Narayana Kocherlakota, who has called for easier policy, said yesterday the Fed must emphasize in its statement that policy will remain accommodative “for a considerable time” after the end of quantitative easing. “We have to bring that forward and hammer it every time we talk about policy,” Kocherlakota, who also doesn’t vote this year, said to reporters in a conference call.
The Treasury will sell $35 billion of two-year notes today. The securities scheduled for sale yielded 0.41 percent in pre-auction trading, compared with 0.283 percent at the previous sale on May 28. Investors bid for 3.04 times the amount of available debt last month, the lowest since February 2011.
To contact the reporters on this story: Lucy Meakin in London at lmeakin1@bloomberg.net; Masaki Kondo in Singapore at mkondo3@bloomberg.net
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net
