BLBG: Treasuries Are Little Changed Before Producer, Consumer Prices
By Wes Goodman
Nov. 18 (Bloomberg) -- Treasuries were little changed, paring a decline, as economists predict government reports today and tomorrow will show U.S. producer and consumer prices fell the most in October since the 1940s.
Five-year yields were at the lowest level in eight months after Treasury Secretary Henry Paulson, speaking in Washington yesterday, said the financial system will be under stress for months. Treasury Inflation Protected Securities are factoring in the lowest inflation in a decade.
``There's a slowing economy and no worry about inflation,'' said Naruki Nakamura, a portfolio manager in Tokyo for Fischer Francis Trees & Watts Inc., part of BNP Paribas SA, which oversees more than $30 billion of debt. ``That's good for bonds.'' Fischer Francis has been favoring Treasuries since August, he said.
Benchmark two-year notes yielded 1.20 percent as of 8:06 a.m. in London, according to BGCantor Market Data. The 1.5 percent security maturing in October 2010 traded at a price of 100 19/32. Five-year notes yielded 2.27 percent. The rate was as low as 2.26 percent, a level not seen since March 18.
Yields on 10-year notes were 3.65 percent after rising to 3.66 percent.
Producer prices tumbled 1.9 percent in October, based on the median estimate in a Bloomberg News survey of economists before the Labor Department reports the figure today. The decline would be the biggest since records began in 1947.
Consumer prices, which the government reports tomorrow, dropped 0.8 percent, a separate survey shows, the most since 1949.
Crude oil prices increased to $55.58 a barrel today, still down 62 percent from a record high of $147.27 reached on July 11.
Treasury Purchases
The difference between rates on 10-year Treasury Inflation Protected Securities, or TIPS, and conventional notes, which reflects the outlook among traders for consumer prices, was 74 basis points. The spread shrank to 66 basis points on Oct. 27, the least since October 1998.
``With the current economic backdrop, it's hard to be bearish on Treasuries,'' Matthew Moore, an interest-rate strategist in New York at Banc of America Securities LLC, said yesterday. The company is one of the 17 primary dealers that trade with the Federal Reserve.
Net purchases of U.S. long-term bonds, notes and stocks rose to $27.2 billion in September from $14 billion the month before, based on a Bloomberg survey of economists before the Treasury Department report today. It would be the most in three months.
Daiwa May Sell
U.S. two-year yields were close to a five-year low as traders added to bets for the Fed to cut interest rates next month to spur growth. The notes are among the most sensitive to changes in borrowing costs because of their short maturity.
Futures on the Chicago Board of Trade show a 98 percent chance the Fed will reduce its 1 percent target for overnight bank loans by 50 basis points on Dec. 16. The odds increased from 82 percent a week ago.
Daiwa SB Investments Ltd. plans to sell Treasuries, saying traders are overestimating how much further the central bank will cut rates.
``I'm planning to sell'' Treasuries, said Kei Katayama, who oversees $1.6 billion of non-yen debt as leader of the foreign fixed-income group in Tokyo at Daiwa SB, part of Japan's second- biggest investment bank. ``The Fed is close to ending'' the reductions.
The central bank has cut its target rate from 5.25 percent in September 2007 and pumped money into the economy to try to spur growth. It has ``done about as much as it can,'' Fed Bank of Kansas City President Thomas Hoenig said yesterday in an interview with PBS's Nightly Business Report.
Job Losses
The Treasury 2010 notes yield 65 basis points more than similar-maturity securities in Japan, near the least since Bloomberg data on the figures started in 1999.
Paulson and Fed Chairman Ben S. Bernanke are scheduled to testify before the House Financial Services Committee today.
U.S. government securities returned 6.8 percent so far this year, according to Merrill Lynch & Co.'s U.S. Treasury Master index, as investors sought all but the safest securities. Corporate bonds fell 15 percent, the Merrill figures show.
Investors piling into U.S. three-month bills, seen as among the most secure investments because of their short maturities, pushed the yield down to 0.09 percent yesterday. It was the lowest since September, when the rate fell to 0.02 percent, a level not seen since World War II.
Treasury Sales
Barack Obama is preparing to take over an economy beset by spreading job losses when he becomes president in January. Citigroup Inc., the U.S. bank with the most employees, said yesterday it plans to cut 52,000 positions over the next year. BlackRock Inc., the largest publicly traded asset manager in the U.S., plans cuts as slumping financial markets erode profits.
Banks are less willing to lend than earlier in the year, judging by market yields. The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, widened to 2.12 percentage points from 2008's low of 76 basis points set in May. The spread increased to 4.64 percentage points on Oct. 10, the most since Bloomberg began compiling the data in 1984.
``There will be stress in the capital markets for a number of months,'' Paulson said yesterday in Washington.
Strains on the country's budget will require the Treasury Department to sell $1.5 trillion in debt this fiscal year, which began Oct. 1, he said. The Treasury announced on Nov. 3 plans to borrow $550 billion in the current quarter and $368 billion in the January-March period.
To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.
