BLBG: Treasuries Post Biggest Weekly Decline Since 2003 on Growth
By Susanne Walker
Aug. 8 (Bloomberg) -- Treasuries fell, with 10-year yields soaring the most in a week since 2003, as reports indicating the U.S. economy is recovering from its worst slump since the Great Depression spurred investors toward riskier assets.
Yields on 10-year debt touched the highest level in almost two months after a report yesterday showed American employers eliminated fewer jobs than forecast in July and a gauge of manufacturing climbed to an 11-month high. The Treasury announced plans to auction a record $75 billion of notes and bonds next week and signaled that issuance of inflation-linked debt would rise in 2010.
“The supply and the slightly improving economy will keep pressure on rates,” said John Spinello, chief technical strategist in New York at Jefferies Group Inc., one of the 18 primary dealers that trade with the Federal Reserve. “It won’t move the Fed any closer to tightening because they don’t want to derail any recovery.”
The benchmark 10-year note yield rose 38 basis points on the week, or 0.38 percentage point, to 3.86 percent, according to BGCantor Market Data. The yield touched 3.88 percent yesterday, the highest since June 11. The 3.125 percent security maturing in May 2019 fell 3, or $30 per $1,000 face amount to 94 2/32.
‘Stopped the Bleeding’
The yield’s increase was the most since the five days ended March 21, 2003, when it surged 40 basis points to 4.10 percent amid speculation the U.S.-led war against Iraq was near its end, damping demand for the safety of government debt.
Treasuries of all maturities lost 1.5 percent this week, according to Merrill Lynch & Co.’s U.S. Treasury Master Index. The Standard & Poor’s 500 Index rose 2.3 on the week, advancing about 1,000 for the first time since November.
The U.S. economy shed 247,000 jobs last month, less than the 325,000 median forecast in a Bloomberg News survey. The unemployment rate fell to 9.4 percent, its first drop since April 2008, down from 9.5 percent in June. The U.S. has lost about 6.7 million jobs since the recession began in December 2007, the most in any post-World War II economic slump.
“This just confirms the notion while we’ve stopped the death spiral, all we’ve done is stop the bleeding to the point that the patient’s off life support,” Mitchell Stapley, who oversees $22 billion as chief fixed-income officer for Grand Rapids, Michigan-based Fifth Third Asset Management. “Nobody’s getting up and walking out of the hospital.”
The Institute for Supply Management’s factory index climbed to an 11-month high in July, the Tempe, Arizona-based group said on Aug. 3. That same day the Commerce Department reported construction spending in the U.S. unexpectedly rose in June. The number of contracts to buy previously owned homes rose a higher- than-forecast 3.6 percent, the National Association of Realtors said on Aug. 4.
Steeper Curve
“Economic recovery will drive the curve steeper, not flatter,” Jim Caron, head of U.S. interest-rate strategy at primary dealer Morgan Stanley in New York, wrote yesterday in a note to clients. “The back-end remains vulnerable to rising inflation risks and the weight of supply.”
The spread between yields on 10-year notes and Treasury Inflation Protected Securities, or TIPS, which reflects the outlook among traders for consumer prices, increased to 2.01 percentage points yesterday, from near zero at the end of last year. The difference has averaged 2.20 percentage points for the past five years.
The difference between 2- and 10-year yields reached 2.58 percentage points yesterday, the most in over a week, suggesting investors are demanding higher yields on longer maturities because of the threat inflation will pick up as the economy starts growing.
Debt Sales
The U.S. will next week sell $37 billion of three-year notes, $23 billion in 10-year securities and $15 billion in 30- year bonds, the Treasury said Aug. 5. The department also signaled that issuance of inflation-indexed securities will rise in fiscal year 2010 and said it would consider replacing the 20- year TIPS with a 30-year security.
“The TIPs announcement was unexpected,” said Andrew Richman, who oversees $10 billion in fixed-income assets as a strategist in West Palm Beach, Florida, for SunTrust Bank’s personal-asset management division. “There’s a lot of supply to be digested, a lot of issuance. There’s an alternative to the 30-year bond, so any issuance of the 30-year will have competition.”
President Barack Obama has pushed the nation’s marketable debt to an unprecedented $6.45 trillion in an effort to spur economic growth, support the financial system and service record deficits. The budget shortfall is projected to increase to $1.85 trillion in the year ending Sept. 30, equivalent to 13 percent of the nation’s economy, according to the nonpartisan Congressional Budget Office.
The Federal Open Market Committee will meet Aug. 12. Policy makers are expected to keep the target rate at a range of zero to 0.25 percent.
Probably Halt
“The only major change possible is a comment that they will not be extending the Treasury Purchase Program,” wrote Ira Jersey, an interest-rate strategist at primary dealer RBC Capital Markets in New York, yesterday in a note to clients.
The Fed announced on March 18 a plan to cap consumer borrowing costs by purchasing up to $300 billion of U.S. debt over six months, a policy known as quantitative easing. The central bank bought $243.463 billion since the purchases began on March 25.
The central bank will probably halt the program in mid- September as scheduled, former central bank governors Lyle Gramley and Laurence Meyer said this week.
Futures on the Chicago Board of Trade indicated a 69 percent chance that the Fed will increase the target lending rate from its range of zero to 0.25 percent by its January meeting, compared with 55 percent odds a month ago.
Treasuries lost 5.5 percent this year and are on a pace to post an annual loss for only the third time since Merrill Lynch started calculating returns. The index rose 14 percent last year as the global economy lapsed into the worst recession since World War II.
To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net.
