BLBG: Treasury 10-Year Yield Near One-Week Low Before Home-Sales Data
By Wes Goodman
Jan. 5 (Bloomberg) -- Treasuries were little changed before a government report that economists said will show pending home sales dropped in November, signaling the industry whose slump led the U.S. into recession has yet to recover.
The yield on the 10-year note traded close to its lowest level in more than a week as European stocks declined, spurring demand for the relative safety of government debt. Nobel Prize- winning economist Paul Krugman said he sees about a one-third chance that the U.S. economy will slide into a recession during the second half of the year.
The yield on the benchmark 10-year note fell 1 basis point to 3.81 percent as of 8:30 a.m. in London, according to BGCantor Market Data, after earlier sliding to 3.79 percent. The 3.375 percent security due in November 2019 rose 1/32, or 31 cents per $1,000 face amount, to 96 15/32. The yield climbed from 3.15 percent on Nov. 27.
“The recovery is slowing,” said Kazuaki Oh’e, a bond salesman in Tokyo at Canadian Imperial Bank of Commerce, the nation’s fifth-largest lender. “Ten-year yields are attractive.”
The Dow Jones Stoxx 600 Index of European shares fell 0.4 percent.
The National Association of Realtors’ index of home- purchase agreements dropped 2 percent in November, following a 3.7 percent gain in October, according to the median estimate in a Bloomberg News survey of economists. Sales fell as Americans waited for a tax credit to be extended, economists said.
Factory orders rose for a third month in November, a separate report from the Commerce Department today may show.
U.S. Recession
The U.S. faces a recession as fiscal and monetary stimulus fade, Krugman said yesterday in an interview in Atlanta, where he was attending an economics conference.
“It is not a low probability event, 30 to 40 percent chance,” he said. “The chance that we will have growth slowing enough that unemployment ticks up again I would say is better than even.”
The financial crisis, which started with the collapse of the U.S. property market in 2007, triggered $1.71 trillion of writedowns and credit losses at banks and other financial institutions and sent the global economy into its first recession since World War II, according to Bloomberg data.
Fed Rates
Ten-year Treasury rates may attract investors while the Federal Reserve keeps its target for overnight bank lending to a range of between zero and 0.25 percent, said Christopher Rupkey, chief financial economist in New York at Bank of Tokyo- Mitsubishi UFJ Ltd.
“Your choice is overnight money at 0.25 percent,” Rupkey said in an interview yesterday. “The fact that it’s so low brings buyers in. I’d be a little cautious that 10-year yields are going to soar.”
The difference between the top of the Fed’s target range and 10-year yields was 3.56 percentage points, after widening to 3.59 percentage points on Dec. 28, the most since August.
Treasury bulls are in the minority.
U.S. government securities fell 1.3 percent in the past month, lagging behind debt in Germany and Japan, as the economy climbed back from recession. Gross domestic product probably expanded 3 percent in the fourth quarter of 2009, and growth will slow to 2.65 percent in the first three months of 2010, Bloomberg surveys show.
Ten-year yields will advance to 3.96 percent by the end of 2010, according to a separate Bloomberg survey, with the most recent forecasts given the heaviest weightings.
‘Wait to Buy’
“The yield will go up” on Treasury notes, said Hideo Shimomura, who helps oversee about $54.1 billion as chief fund investor in Tokyo at Mitsubishi UFJ Asset Management Co., part of the world’s biggest bank by assets. “We should wait to buy” because growth may wane later in 2010, he said.
Treasuries dropped 3.7 percent in 2009, according to indexes compiled by Bank of America’s Merrill Lynch unit, the worst performance since Merrill began tracking the data in 1978. The one-month loss compares to declines of 0.3 percent in Germany and 0.1 percent in Japan, the indexes show.
U.S. corporate bonds returned 0.8 percent in the period, capping a 26 percent surge in 2009 according to the Merrill data.
Default Swaps
The cost of protecting corporate and sovereign bonds in Asia and the Pacific from default fell to the lowest level since May 2008, according to traders of credit-default swaps and CMA DataVision prices, sparking speculation some investors are seeking higher-yielding assets.
The Markit iTraxx Asia index of credit-default swaps covering 50 investment-grade borrowers outside Japan declined 2.5 basis points to 93.5 basis points, Barclays Plc and CMA prices show. A basis point is 0.01 percentage point.
Credit-default swap indexes are benchmarks for protecting bonds against default, and traders use them to speculate on credit quality. An increase suggests deteriorating perceptions of creditworthiness and a drop shows improvement. The contracts pay the buyer face value in exchange for the underlying securities if a borrower fails to meet its debt agreements.
Treasury two-year notes rose yesterday for the first time in two weeks as investors bet that a selloff that pushed yields to the highest level since August wasn’t justified following almost two years of job losses.
Fed Governor Elizabeth Duke said yesterday that joblessness will probably stay high even amid a “moderate pace” of economic growth, warranting continued low interest rates for an “extended period.”
“We were oversold going into year-end and we are seeing some of that reverse,” said George Goncalves, chief fixed- income rates strategist at Cantor Fitzgerald LP, one of 18 primary dealers that trade directly with the Fed.
To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.
