BLBG: Treasuries Little Changed as Sales Loom; Yield Gap Near Widest
By Theresa Barraclough
Nov. 6 (Bloomberg) -- Treasuries were little changed, with the yield gap between two- and 10-year notes near the widest since July as next week’s planned auctions of a record $81 billion of securities curbed demand for longer-maturity debt.
Ten-year securities dropped this week before a government report today forecast to show employers cut the fewest jobs in more than a year in October, signaling the economic recovery is gaining momentum. Ten-year yields were near the highest level since Oct. 27 as the Dow Jones Industrial Average posted its largest gain in four months after Cisco Systems Inc. said an improving economy spurred a sales rebound.
“It’s the first set of auctions after the government finished Treasury purchases, so there are some concerns,” 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. “There’ll be some upward pressure on yields.”
The yield on the benchmark 10-year note rose two basis points to 3.54 percent as of 6:05 a.m. in London, according to BGCantor Market Data. The 3.625 percent security maturing in August 2019 fell 1/8, or $1.25 cents per $1,000 face amount, to 100 23/32. The yield, which reached 3.56 percent on Nov. 4, the highest since Oct. 27, has increased 15 basis points this week.
Two-year yields, among the most sensitive to benchmark borrowing costs, were little changed at 0.89 percent after the Federal Reserve on Nov. 4 repeated its intent to keep interest rates “exceptionally low” for “an extended period.” Policy makers held the target rate for overnight lending between banks in a range of zero to 0.25 percent and indicated it will stay there as long as the inflation outlook is stable and unemployment fails to decline.
Bracing for Supply
The government is scheduled to sell $40 billion of 3-year notes, $25 billion of 10-year debt and $16 billion of 30-year bonds next week. The amounts are all records, according to data compiled by Bloomberg. It will also reintroduce 30-year Treasury Inflation Protected Securities, or TIPS, and stop issuance of the 20-year inflation-linked security.
“The market is trying to set up for supply,” said Alex Li, an interest-rate strategist in New York at Credit Suisse AG, one of the 18 primary dealers that trade with the Fed. “That’s why the back end is underperforming.”
Bear Steepening
The spread between 2- and 10-year yields steepened to 264 basis points today from 249 basis points at the end of last week as investors sought higher returns to compensate for the risk of inflation. The gap widened to 266 basis points yesterday, the most since July 28, Bloomberg data shows. It reached a record 282 points on June 5.
The difference between yields on regular bonds and Treasury Inflation Protected Securities, or TIPS, is near the widest since Aug. 28, 2008, indicating investors expect inflation to accelerate. The gap between rates on 10-year notes and TIPS rose to 2.15 percentage points today from 2.02 points last week, indicating concern about rising consumer prices is the highest since before the collapse of Lehman Brothers Holdings Inc.
The yield curve may widen to the most since June and then climb to a record after breaking “critical resistance,” Morgan Stanley said. The spread may increase first to 275 basis points as the Fed committed to hold down rates, James Caron, head of U.S. interest-rate strategy at Morgan Stanley in New York, wrote in an e-mailed note.
“Our core view remains for a bear steepening of the curve” that may expand it to more than 300 points, Caron wrote Nov. 4.
Global Recovery
The world’s biggest central banks are starting to unwind emergency measures introduced earlier this year to stave off a second Great Depression. European Central Bank President Jean- Claude Trichet yesterday said his bank will withdraw some liquidity operations, and the pound climbed after the Bank of England slowed the pace of bond purchases. A day earlier, the Federal Reserve outlined the circumstances in which it would be prepared to raise interest rates.
Investors and executives may soon have to do without the flood of liquidity that propped up the economy earlier this year, as concerns about new asset bubbles start to mount.
Australia’s central bank today signaled it will continue to lead the world in raising interest rates, as the nation’s economy will expand 1.75 percent this year, more than three times the pace forecast in August.
“Conditions in the global and Australian economies are significantly better than was expected when the board lowered the cash rate to 3 percent” in April, a half-century low, the Reserve Bank of Australia said.
Governor Glenn Stevens this week became the first central banker to raise borrowing costs twice this year, increasing them to 3.5 percent.
Equities Rallying
The RBA’s forecasts helped extend a rally in global stocks that also sapped demand for Treasuries. The MSCI Asia Pacific Index of regional shares increased 1 percent today on optimism over economic recovery and corporate earnings. The Dow added 2.1 percent and the Standard & Poor’s 500 Index advanced 1.9 percent yesterday.
Payrolls fell by 175,000 workers, the smallest drop since August 2008, according to the median estimate of economists surveyed by Bloomberg News.
Reports yesterday showed initial jobless claims dropped by 20,000 to 512,000 in the week ended Oct. 31 and the measure of employee output per hour jumped at a 9.5 percent annual rate in the third quarter, topping the highest estimate of economists surveyed by Bloomberg News.
“The labor market is still atrocious at the moment, but last night’s data was a good signal that things may improve more quickly than widely anticipated,” said Adam Carr, a senior economist at ICAP Australia Ltd. in Sydney.
Companies such as Deere & Co., the world’s largest maker of agricultural equipment, are starting to recall staff after the world’s largest economy expanded last quarter at the fastest pace in two years. The U.S. economy grew last quarter for the first time in a year, expanding at a 3.5 percent pace.
To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net.
