BLBG: Treasury Futures Little Changed Ahead of Three Sales This Week
By Wes Goodman
Nov. 23 (Bloomberg) -- Treasury futures contracts were little changed, after a rally last week pushed two-year yields to the lowest level in 2009, as the U.S. prepared to sell a record $118 billion of notes in three auctions starting today.
The sales begin with $44 billion of two-year notes, raising speculation yields near a record low will curtail demand. Yields on Treasuries due in 2011 dropped to 0.67 percent last week, approaching the all-time low of 0.60 percent set Dec. 17. Three- month bill rates turned negative.
“You’re going to have a large amount of supply,” said Peter Jolly, the Sydney-based head of market research for the investment-banking unit of National Australia Bank Ltd., the nation’s third-largest lender by market value. “There are some sizable challenges for the rally to continue. We’re more likely to see yields move higher.”
Ten-year futures contracts for December delivery yielded 3.65 percent as of 6:29 a.m. in London, based on electronic transactions at the Chicago Board of Trade. The price was 119 17/32.
Trading of Treasury bills, notes and bonds was closed in Japan today for a holiday.
Two-year rates will rise to 1.01 percent by year end, a Bloomberg survey of banks and securities companies showed, with the most recent forecasts given the heaviest weightings.
Ten-year yields will climb to 3.52 percent from today’s 3.37 percent, according to the survey.
Pre-Auction Trade
The two-year notes scheduled for sale today yielded 0.79 percent in pre-auction trading, versus 1.02 percent at the previous auction on Oct. 27.
Investors bid for 3.63 times the amount of debt on offer last month. The figure was the most in two years and the second- highest since Bloomberg figures begin in 1992.
Indirect bidders, the category of investors that includes foreign central banks, purchased 44.5 percent of the notes, versus an average of about 44 percent for the past 10 sales.
Two-year Treasuries have returned 1.6 percent in 2009, versus a 2 percent loss for the whole Treasury market, according to indexes compiled by Bank of America’s Merrill Lynch unit.
Today’s auction will match the record set last month. The Treasury is scheduled to sell $42 billion of five-year securities tomorrow and $32 billion of seven-year debt on Nov. 25, both the largest amounts ever.
Riskier Assets
Treasury two-year note yields fell last week on speculation a rally in riskier assets had outpaced growth prospects and as Federal Reserve officials signaled interest rates will remain near zero. The policy-setting Federal Open Market Committee is scheduled to release the minutes of its Nov. 4 meeting tomorrow.
The MSCI World Index of shares has returned about 28 percent so far this year. The index is valued at 31.5 times reported earnings, more than tripling in a year.
MSCI’s Asia Pacific Index of regional shares excluding Japan rose 0.7 percent today, snapping a two-day loss.
Gold for immediate delivery advanced to a record $1,165.06 an ounce today.
The three-month bill rate was 0.005 percent on Nov. 20, down five basis points, or 0.05 percentage point, for the week, according to Bloomberg data. Three-month bill rates turned negative on Nov. 19 for the first time since last year’s credit freeze.
For the first time in seven decades, Treasury bills are paying no interest while stocks continue to appreciate -- a divergence that might be perilous if Federal Reserve Chairman Ben S. Bernanke didn’t know all about 1938.
Never Materialized
That’s when the Standard & Poor’s 500 Index climbed 25 percent even as bill rates tumbled to 0.05 percent from 0.45 percent. As 1939 began, stocks began a three-year, 34 percent decline after the Fed increase borrowing costs prematurely to stymie inflation that never materialized.
While almost no one expects Bernanke, a self-described “Great Depression” buff, to raise rates before mid-2010, bond investors say with unemployment above 10 percent and housing taking another downturn, they have no qualms about lending the government money for nothing to ensure their capital is preserved. Stock investors, meanwhile, say the worst is over and that low borrowing costs coupled with the $12 trillion of fiscal and monetary stimulus will bolster earnings.
“There’s clearly room for the stock market to do better,” said Mark Bronzo, a money manager in Irvington, New York, at Security Global Investors, which oversees $21 billion. “If money is all going into short-term securities, at some point, investors will say ‘enough of it’ and the next incremental change will be for money to chase riskier assets.”
A survey of investors by Ried, Thunberg & Co. shows fund managers became more bearish on Treasuries for the first half of next year.
The company’s index measuring investors’ outlook on government debt through the end of June fell to 40 for the seven days ended Nov. 20 from 41 the previous week. A reading below 50 shows investors expect prices to fall. The economic analysis company based in Jersey City, New Jersey, surveyed 22 fund managers controlling $381 billion.
To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.
