TG: Treasuries Decline as Stocks Gain, Report to Show Services Grew
By Matthew Brown and Wes Goodman
Dec. 3 (Bloomberg) -- Treasuries fell for a third day, the longest losing streak in almost a month, as stocks gained amid signs the global economy is recovering from the deepest recession since World War II.
The decline pushed the yield on the 10-year note up to the highest level in more than a week as the MSCI World Index of shares gained for a fourth day. Economists said a report will show service industries in the U.S. expanded in November for a third month. The Treasury Department is scheduled to announce today how much it plans to raise through note and bond sales next week.
“The U.S. economy is seeing some light at the end of the tunnel now, and that’s weighing on the Treasuries market,” said Marius Daheim, a senior fixed-income strategist in Munich at Bayerische Landesbank, Germany’s second-largest state-owned bank. “The Treasury will announce issuance volumes for next week, which are likely to be high, to say the least.”
The yield on the 10-year note advanced 3 basis points to 3.34 percent as of 6:57 a.m. in New York, according to BGCantor Market Data, after earlier reaching 3.35 percent, the highest level since Nov. 24. The 3.375 percent security due November 2019 fell 1/4, or $2.50 per $1,000 face amount, to 100 1/4.
Two-year yields rose 2 basis points to 0.74 percent, or 14 basis points above the record low set in December last year. The difference between two- and 10-year rates increased 1 basis point to 2.60 percentage points, from 1.45 percentage points at the end of 2008.
The MSCI World Index climbed 0.6 percent and the Dow Jones Stoxx 600 Index of European shares added 0.5 percent.
‘Hit Bottom’
Two-year note yields, among the most sensitive to interest rates, rose the most in over a month yesterday as Federal Reserve Bank of Richmond President Jeffrey Lacker said the U.S. economy “has hit bottom” and a Fed report said economic conditions improved “modestly.”
Bank of America Corp., the nation’s biggest lender, said yesterday it will repay $45 billion of U.S. government bailout funds.
The U.S. plans to sell three-year notes on Dec. 8, 10-year notes on Dec. 9 and 30-year bonds on Dec. 10. The package will total $74 billion, according to Wrightson ICAP LLC, an economic advisory firm in Jersey City, New Jersey. The government raised $81 billion the last time it sold this combination of securities in November.
The Institute for Supply Management’s index of non- manufacturing businesses that make up almost 90 percent of the economy rose to 51.5 in November, the most since April 2008, from 50.6 the previous month, according to the median forecast of 71 economists surveyed by Bloomberg.
The Labor Department will say tomorrow that unemployment held at a 26-year high of 10.2 percent in November, a Bloomberg survey shows.
Record Issuance
Government securities fell this year as President Barack Obama increased the U.S. debt to record levels, rising to $7.01 trillion in September, to combat the U.S. recession. The broad Treasury market handed investors a 1.6 percent loss so far this year, indexes compiled by Bank of America’s Merrill Lynch unit show.
Corporate bonds returned 26 percent as investors sought higher-yielding assets, based on the Merrill indexes.
Ten-year note yields will climb to 3.81 percent by the middle of next year, according to a Bloomberg survey of banks and securities firms, with the most recent forecasts given the heaviest weightings.
Investors should sell shorter-maturity U.S. Treasuries because yields are below fair value and their recent ranges, Jan Loeys, global head of market strategy in London at JPMorgan Chase & Co wrote in a research report.
Higher Yields
“Two-year Treasury yields are approaching their all-time lows recorded in December of last year,” he said. “We expect them to move steadily higher as quantitative easing ends and more Fed tightening is priced in. Our forecast is for two-year yields to reach 0.9 percent by the end of the year.”
Central bank statements on Nov. 4 and Nov. 24 repeated the Fed’s view that it would keep the rate “for an extended period.” It cut its target to a range of zero to 0.25 percent in December of last year.
“The most likely outcome is that the economy will grow at a reasonable pace next year,” Lacker said yesterday. Policy makers face the challenge of determining “when and how rapidly” to remove monetary stimulus, he said.
Eight of the Fed’s districts “indicated some pickup in activity or improvement in conditions,” while the other four said conditions were little changed or mixed, the central bank said in its Beige Book business survey, published two weeks before officials meet to set monetary policy. The labor and commercial real estate markets remained “weak,” the report said.
‘Prepare for Slow Growth’
Pacific Investment Management Co., which runs the world’s biggest bond fund, said investors who are pushing up stocks and high-yield debt should instead be preparing for a period of slower-than-usual economic growth.
Dubai World, the state-owned company that is seeking to delay payments on some of its $59 billion in obligations, shows investors shouldn’t forget the lessons of the crisis, Michael Gomez, co-head of emerging markets at Pimco, wrote in a report on the company’s Web site.
Pimco, in Newport Beach, California, is a unit of Munich- based insurer Allianz SE.
Equity markets around the world have surged this year, with the MSCI World Index gaining 72 percent from its low on March 9, prompting economists including New York University Professor Nouriel Roubini to warn of a “bubble” in financial markets.
To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net; Matthew Brown in London at mbrown42@bloomberg.net
