BLBG: Treasuries Little Changed as Report Shows Manufacturing Drop
By Dakin Campbell and Kim-Mai Cutler
Nov. 17 (Bloomberg) -- Treasuries were little changed as a gauge of manufacturing in New York fell to a record low amid the seizure in credit markets.
The yield difference between two- and 10-year notes was near the widest since October 2003 as a survey of analysts forecast the world's biggest economy will shrink next year. Two- year yields were near the lowest in five years as stocks fell in Europe and Asia, supporting demand for fixed-income debt.
``Every day it seems there is a number with some importance'' for the Treasury market, said Martin Mitchell, head government bond trader at the Baltimore unit of Stifel Nicolaus & Co. ``We will continue to see signs that the economy is deteriorating.''
The yield on the 10-year note fell one basis point, or 0.01 percentage point, to 3.72 percent at 8:39 a.m. in New York, according to BGCantor Market Data. The 3.75 percent security maturing in November 2018 rose 3/32, or 94 cents per $1,000 face amount, to 100 8/32. The two-year note yield yielded 1.21 percent.
After growing 1.4 percent this year, the U.S. economy will contract 0.2 percent in 2009, according to the median estimate in a poll taken by the National Association for Business Economics.
New York Manufacturing
The yield gap between two- and 10-year Treasury notes, the so-called yield curve, will flatten this week, Mitchell said.
The Treasury will announce Nov. 20 it plans to sell $38 billion in two-year notes and $27 billion in five-year notes, according to Wrightson ICAP, a Jersey City, New Jersey-based research firm specializing in U.S. government finance. The department will hold the sale Nov. 24 and a five-year note auction will be held one day later.
The Federal Reserve Bank of New York's general economic index, the first economic measure of many to be announced this week, fell to minus 25.4, the lowest since records began in 2001, from minus 24.6 percent in October, the bank said today. Readings below zero for the Empire State index signal manufacturing is shrinking.
The MSCI World Index of equities fell for a second day, slipping 0.6 percent, as stock markets in Europe and Asia declined. U.S. futures retreated.
President-elect Barack Obama said in an interview yesterday on the CBS News program ``60 Minutes'' the government needs to assist U.S. automakers, raising speculation the Treasury may sell more debt to pay for his plans.
Bond Returns
Under normal circumstances, Obama said, allowing General Motors Corp. to enter bankruptcy, restructure and emerge as ``a viable operation'' might have been a preferred route. Now, ``you could see the spigot completely shut off so that it would not potentially permit GM to get back on its feet,'' he said.
Japan's economy, the world's second-biggest, entered its first recession since 2001, a government report showed today.
U.S. government securities returned 6.5 percent this year, according to Merrill Lynch & Co.'s U.S. Treasury Master index, as tumbling credit markets and a global recession spurred demand for the safest assets. German bonds earned 8 percent, while Japanese securities handed investors 1.5 percent.
Investors are shifting to European government bonds at the expense of Treasuries on speculation policy makers have more scope to cut interest rates than the Federal Reserve. The European Central Bank's key rate of 3.25 percent and the Bank of England's 3 percent target compare with 1 percent in the U.S.
Fed May Buy Treasuries
Pacific Investment Management Co., which runs the world's biggest bond fund, favors two- and three-year European notes, Paul McCulley, a managing director at the Newport Beach, California, firm said in a Bloomberg Radio interview on Nov. 13.
Futures on the Chicago Board of Trade show a 90 percent chance the Fed will halve its target rate for overnight bank loans from 1 percent at its next meeting on Dec. 16. The odds were 82 percent a week ago. The rest of the bets are for a quarter-percentage point reduction.
Industrial production increased 0.2 percent in October, following a 2.8 percent slide in September that was the most in almost 34 years, according to the median forecast in a Bloomberg News survey of economists. The report is also likely to show capacity utilization stayed at a five-year low. The Fed releases the figures at 9:15 a.m. in Washington.
The U.S. central bank may consider buying Treasuries to hold down yields if the global financial crisis deepens, according to Goldman Sachs Group Inc., one of the 17 primary dealers that trade with the central bank.
Fed Backstop
``Fed officials could announce specific targets for longer- term interest rates and commit to purchasing enough securities to achieve those targets,'' Goldman economists led by Jan Hatzius in New York wrote in a Nov. 14 report.
Treasury Secretary Hank Paulson will speak about the economy at 6:30 p.m. today in Washington.
Yields indicate banks are less willing to lend. The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, widened to 2.09 percentage points, from 2.03 percentage points a week ago.
To contact the reporters on this story: Dakin Campbell in New York at dcampbell27@bloomberg.net; Kim-Mai Cutler in London at kcutler@bloomberg.net.
