BLBG: Treasuries Little Changed as Stocks Gain Before 3-Year Auction
By Susanne Walker and Cordell Eddings
Sept. 8 (Bloomberg) -- Treasuries were little changed as stocks gained and the U.S. prepared to sell $38 billion of three-year notes, the first of this week’s three auctions totaling $70 billion.
Ten-year notes held near last week’s closing levels before the Federal Reserve’s planned purchase of securities maturing from May 2016 to August 2019 today. Fed data show bond dealers are purchasing and financing high-risk debt even as investors express doubt about the economic recovery. The Standard & Poor’s 500 Index rose 0.4 percent.
“The question today is, what will the appetite be for supply as people come back from a long weekend?” said Paul Horrmann, a broker in Jersey City, New Jersey, at ICAP Plc, the world’s largest inter-dealer broker. “We’re going to have to give back some of the depreciation in yield for the supply to be taken down correctly. We are trading at the bottom of the summer’s yield range so it may be too expensive right now.”
The yield on the benchmark 10-year note rose one basis point, or 0.01 percentage point, to 3.45 percent at 10:03 a.m. New York, according to BGCantor Market Data. The 3.625 percent security maturing in August 2019 fell 1/32, or 31 cents per $1,000 face amount, to 101 15/32.
The 10-year note yield touched a seven-week low of 3.28 percent last week as some investors pared expectations for the pace of global economic recovery. The Treasury market was closed yesterday for the Labor Day holiday.
Supply Pressures
“I still hold to a bullish view on treasuries from an intermediate-term perspective,” William O’Donnell, U.S. government bond strategist at RBS Securities Inc. in Stamford, Connecticut, wrote in a note to clients today. “Yes, near-term technicals and supply conditions are a negative for bonds. Even so, I stick to the view that the pace of the economic recovery will disappoint and that expected U.S. disinflation will make Treasuries an attractive asset.” RBS is one of 18 primary dealers that trade with the Fed.
Three-year yields have fallen about 36 basis points since the previous sale of the securities on Aug. 11. That auction attracted bids for 2.89 times the amount on offer, the highest for a sale of the maturity since November. The when-issued three-year note is trading at 1.48 percent.
Today’s $38 billion auction is followed by a $20 billion sale of 10-year debt tomorrow and a $12 billion offering of 30- year securities on Sept. 10.
“I’m short Treasuries because of supply pressures,” said Kei Katayama, who oversees $1.6 billion of non-yen debt in Tokyo as leader of the foreign fixed-income group at Daiwa SB Investments Ltd., part of Japan’s second-biggest investment bank. “I’m very cautious because there’s still a huge supply coming.” A short position is a bet an asset will decline.
Investors Less Bearish
Fund managers became less bearish on the outlook for Treasuries through the end of the year, a survey by Ried, Thunberg & Co. shows. The company’s sentiment index matched this year’s high of 48 for the week ended Sept. 4. A reading below 50 means investors expect prices to fall. The economic analysis firm in Jersey City surveyed 25 investors overseeing $1.34 trillion.
Investors should buy U.S. Treasury notes betting that price declines will prompt central banks to maintain lower rates, according to Mizuho Asset Management Co., a unit of Japan’s second-largest bank.
“Buy two-year notes now,” said Akira Takei, a Tokyo- based manager in the international bond investment department at Mizuho Asset. “Every central bank will be committed to keeping interest rates low for a long time. Deflationary pressure is now prevailing, which is very hard to get out of.”
‘Money Going Back’
Wall Street’s biggest bond dealers are loosening their grip on U.S. government debt at a record pace, signaling a continued rally in credit markets. Holdings of Treasuries by primary dealers fell to a negative $10.5 billion last month -- a so- called net short position -- from a record net long of $93.6 billion in June, according to data compiled by the central bank.
The fastest turnaround since the Fed began tracking the data in 1997 shows dealers are purchasing and financing higher- risk debt even as investors express doubt about the economic recovery. Dealers typically place bets against Treasuries to hedge corporate and mortgage bonds, and net short positions averaged $63 billion in the 10 years before the collapse of subprime home loans caused credit markets to freeze in 2007.
“It’s money going back to work again in some level of riskier assets,” said Donald Galante, the chief investment officer and senior vice president of fixed income at New York- based MF Global Ltd., a broker of exchange-traded futures.
Libor-OIS
Central bankers have cut borrowing costs to records and injected billions into the financial system after the U.S. housing slump triggered the collapse of Lehman Brothers Holdings Inc. a year ago, throwing the global economy into its worst slump since the Great Depression. Since then money markets are showing increased confidence.
After soaring in October 2008 to 4.64 percentage points, the difference between what banks and the Treasury pay to borrow money for three months was at 0.19 percentage point today. The so-called TED spread is now below its average of 0.32 percentage point in the 10 years before mid-2007.
The Libor-OIS spread, another gauge of the reluctance of banks to lend, contracted to 0.14 percentage point, from a peak of 3.64 percentage points in October.
To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net. To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net.
