BLBG: Treasuries Are Little Changed Before Output, Confidence Data
By Anchalee Worrachate and Wes Goodman
Aug. 14 (Bloomberg) -- Treasuries were little changed before economic reports today that are forecast to show industrial output and consumer confidence rose.
Thirty-year Treasuries headed for a weekly gain amid weaker-than-forecast retail-sales data and increased demand at debt sales this week. U.S. industrial production climbed 0.4 percent in July, erasing the previous month’s decline, according to the median forecast in a Bloomberg News survey.
“We’ve seen some stabilization in the economy but what the market is pricing in might be too optimistic compared to the likely economic reality,” said Charles Diebel, head of European interest-rate strategy in London at Nomura International Plc. “Yields may edge higher into the data. Consumer confidence may disappoint, and that should be supportive of the Treasuries.”
The yield on the 10-year note was at 3.60 percent as of 7 a.m. in New York, according to BGCantor Market Data. The 3.625 percent security maturing in August 2019 traded at 100 8/32.
The yield spread between two- and 10-year notes narrowed to 250 basis points, from 255 basis points. Ten-year yields declined a quarter percentage point this week, the most since the period ended March 20. They will climb to 3.79 by year-end, according to a Bloomberg survey of banks and securities companies, with the most recent forecasts given the heaviest weightings.
Consumer Sentiment
The Reuters/University of Michigan preliminary survey on consumer sentiment for this month may show that confidence rose to 69, from 66 at the end of July, according to the survey median.
U.S. government securities handed investors a loss of 4.3 percent so far this year, according to Merrill Lynch & Co.’s U.S. Treasury Master index, versus a 17 percent return for stocks on the MSCI World Index.
MSCI’s Asia Pacific Index of regional shares rose 0.7 percent today as economists said the Fed report will show U.S. output at manufacturers, mines and utilities climbed. Treasuries trimmed losses as the index gave up earlier gains of as much as 1 percent. Europe’s Dow Jones Stoxx 600 Index climbed 0.3 percent.
The yen advanced against the euro and the dollar on speculation Japanese companies are bringing back earnings on overseas assets. The U.S. will make $79.2 billion in redemption and coupon payments for Treasuries on Aug. 17, according to estimates by Bank of Tokyo-Mitsubishi UFJ Ltd.
Fed Balance Sheet
The Fed has more than doubled the size of its balance sheet in the past 12 months to $2.02 trillion by purchasing Treasuries and other securities to thaw credit markets that froze last year.
Fed officials have started to phase out such programs, deciding this week to let a $300 billion program to buy long- term Treasuries expire in October.
Yields indicate the central bank’s measures are generating some successes.
The London interbank offered rate, or Libor, for three- month dollar loans fell to a record 0.43 percent. Libor is about 18 basis points more than the upper end of the Fed’s target rate for overnight loans, narrowing from last year’s high of 3.32 percentage points in October.
The spread between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, was 0.27 percentage point, close to the least since March 2007.
Normal Spread
The Libor-OIS spread was 24 basis points today. Greenspan said in a June 2008 interview he wouldn’t consider credit markets back to “normal” until the spread narrowed past the 25 basis-point level.
U.S. 30-year fixed mortgage rates declined to 5.38 percent from this year’s high of 5.74 percent in June. They were as low as 4.85 percent in April, according to Bankrate.com in North Palm Beach, Florida.
The Labor Department will say today that U.S. consumer prices fell 1.9 percent in July from a year earlier, the most since January 1950, a Bloomberg surveys show.
The difference between rates on 10-year notes and Treasury Inflation Protected Securities, which reflects the outlook among traders for consumer prices, was 1.80 percentage points, the least in a week. The five-year average is 2.20 percentage points.
Treasuries rose yesterday after a government report showing an unexpected drop in retail sales suggested inflation is restrained, helping to spur higher-than-forecast demand at a record $15 billion auction of 30-year bonds.
Debt Auctions
The benchmark 30-year bond drew a yield of 4.541 percent, below the 4.556 percent forecast in a Bloomberg News survey of eight of the Fed’s primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with amount of securities offered, was 2.54, compared with an average of 2.36 at the last 10 auctions.
The auction was the last sales of coupon-bearing debt this week, totaling $75 billion.
“There is still good demand for long-dated Treasuries amid the weak economy,” said Ira Jersey, an interest-rate strategist at RBC Capital Markets in New York, one of 18 primary dealers, those companies that are required to bid at Treasury auctions.
The retail sales figure combined with demand for Treasuries may send 10-year yields down to 3.5 percent by month-end, BNP’s Maejima said.
To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net.
