BLBG: Treasuries Set for Worst Year Since 1978 as U.S. Steps Up Sales
By Theresa Barraclough
Dec. 30 (Bloomberg) -- Treasuries headed for the worst year since at least 1978 as the U.S. stepped up debt sales to help spur growth in an economy recovering from its deepest recession in six decades.
U.S. bonds were little changed on the day before today’s sale of $32 billion in seven-year debt, the last of three auctions this week totaling $118 billion. The Treasury sold a record-tying $42 billion of five-year securities yesterday and $44 billion in two-year notes on Dec. 28. U.S. government securities have fallen 3.6 percent this year, according to Bank of America Merrill Lynch indexes, the worst annual performance since at least 1978, when Merrill began collecting the data.
“This is the largest expansion of fiscal deficit in a single year other than in wartime and depression,” prompting the large loss in Treasuries, said Christian Carrillo, a senior interest-rate strategist at Societe Generale SA in Tokyo. “There is genuine expectation of economic recovery and eventual monetary tightening priced in. It could have been a lot worse.”
The yield on the benchmark 10-year note fell one basis point, or 0.01 percentage point, to 3.8 percent as of 5:38 a.m. in London, according to BGCantor Market Data. The yield has increased 1.58 percentage points this year. The 3.375 percent debt due in November 2019 rose 2/32, or 63 cents per $1,000 face amount, to 96 18/32.
President Barack Obama is borrowing unprecedented amounts for spending programs. U.S. marketable debt increased to a record $7.17 trillion in November from $5.80 trillion at the end of last year.
Record-Tying Sales
The last sale of seven-year notes, in November, drew a high yield of 2.835 percent and attracted bids for 2.76 times the amount on offer, compared with 2.65 times at the October offering. The seven-year security to be sold today yielded 3.35 percent in pre-auction trading.
“There’s some attraction in yields, so it’ll be another so-so auction,” said Kazuaki Oh’e, a bond salesman in Tokyo at Canadian Imperial Bank of Commerce, the nation’s No. 5 lender. “Investors are looking for more safety and less risk. It’s easier to be safe going into the new year.”
Yesterday’s record-tying $42 billion five-year note sale drew a yield of 2.665 percent, compared with the forecast of 2.678 percent in a Bloomberg News survey. The bid-to-cover ratio was 2.59, compared with an average ratio of 2.36 times at the last 10 auctions. The two-year auction on Dec. 28 was weaker, drawing a yield of 1.089 percent, against a forecast of 1.059 in a Bloomberg survey. The bid-to-cover ratio was 2.91, the lowest since August.
‘Grind Lower’
“With two auctions out of the way and the magic seven ahead of us, we believe that supply fears, which helped to get bonds into attractive levels, will fade for now and the next few days should be a steady grind lower in rates,” said George Goncalves, chief fixed-income rates strategist at Cantor Fitzgerald LP, one of 18 primary dealers that trade directly with the central bank.
Holders of U.S. debt have made a return of 81 percent over the past decade, according to the Bank of America Merrill Lynch indexes. That compares with an 8 percent loss for the Standard & Poor’s 500 Total Return Index.
The Treasury yield curve, a barometer of the health of the U.S. economy, widened to a record earlier this month as investors bet an accelerating recovery will fuel inflation and hurt demand for the unprecedented sales of government debt.
Recovery Signs
The gap between 2-year and 10-year yields widened to a record 2.88 percentage points on Dec. 22, from 1.45 percentage points at the beginning of the year. The spread was at 2.72 percentage points today.
An index of home prices in 20 U.S. cities rose in October for a fifth consecutive month. The S&P/Case-Shiller home-price index increased 0.4 percent from the prior month on a seasonally adjusted basis, after a 0.2 percent rise in September. The gauge was down 7.3 percent from October 2008, the smallest year-over- year decline since October 2007.
Confidence among U.S. consumers rose in December for a second month. The New York-based Conference Board’s consumer confidence index rose to 52.9 this month from 50.6 in November. The measure reached a record low 25.3 in February.
Fed Chairman Ben S. Bernanke has cited a tame inflation outlook as a reason for keeping the target interest rate for overnight loans between banks at a record low range of zero to 0.25 percent. Treasury Inflation Protected Securities, or TIPS, a gauge of trader expectations for consumer prices, show the improving economy may change sentiment and spark further bond declines.
The gap between yields on Treasuries and TIPS due in 10 years, a measure of the outlook for consumer prices, expanded to 2.43 percentage points yesterday, the widest since July 2008. It held at 2.39 percentage points today.
To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net
