BLBG: U.S. 10-Year Yield Is Near 3-Week Low Before $21 Billion Sale
By Wes Goodman
Jan. 13 (Bloomberg) -- Treasury 10-year yields were near the lowest level in three weeks on speculation demand will increase at a $21 billion auction of the securities today following signs the global economic recovery is slowing.
Benchmark 10-year notes gained the most in almost a month yesterday and a record-tying $40 billion sale of three-year debt drew stronger demand than traders predicted. An unexpected shift by China’s central bank to restrain lending may foreshadow higher interest rates, restraining the world’s fastest-growing major economy.
“The global economy is still growing but the pace of the recovery will be slow,” said Tsutomu Komiya, who handles U.S. government debt in Tokyo at Daiwa Asset Management Co., which has $77 billion in assets. “The Treasury market will rally.”
Ten-year notes yielded 3.73 percent as of 6 a.m. in London, according to BGCantor Market data. The rate dropped 11 basis points yesterday to the lowest level since Dec. 23. The 3.375 percent security due in November 2019 traded at 97 1/8.
MSCI’s Asia Pacific Index of shares fell 1.4 percent, snapping a three-day gain and raising speculation investors will seek the relative safety of Treasuries.
“Risk appetite has soured,” Mitul Kotecha, head of global foreign-exchange strategy in Hong Kong for Calyon, the investment-banking unit of France’s Credit Agricole SA, wrote in a report today.
The People’s Bank of China yesterday raised the proportion of deposits that banks must set aside as reserves by 50 basis points, or 0.5 percentage point, starting Jan. 18.
U.S. Earnings
Earnings reports from Alcoa Inc., the largest U.S. aluminum maker, and Chevron Corp., the nation’s second-largest oil company, helped lead Asian stocks lower, Kotecha wrote.
Alcoa, based in New York, on Jan. 11 reported fourth- quarter profit that trailed analysts’ estimates. Chevron, whose main offices are in San Ramon, California, said the same day that earnings in the final three months of last year will be lower than in the previous quarter.
Federal Reserve Bank of Dallas President Richard Fisher said the U.S. faces challenges to sustained economic growth, including banks’ reluctance to lend and insufficient confidence among consumers and businesses. He made the comments in a speech yesterday in Waco, Texas.
Pre-Auction Trading
The 10-year notes scheduled for sale today yielded 3.74 percent in pre-auction trading, compared with 3.448 percent at the previous auction of the securities on Dec. 9.
The difference between two- and 10-year yields was 2.80 percentage points, or just 10 basis points below the record, which will help spur demand at today’s sale, Daiwa Asset’s Komiya said.
Investors bid for 2.62 times the amount on offer last month, versus an average of 2.67 times for the past 10 auctions. Indirect bidders, the group that includes foreign central banks, bought 34.9 percent of the securities, versus the 10-sale average of 38.8 percent.
Ten-year notes handed investors a 2 percent loss in the past six months, versus a 1 percent gain for two-year securities, according to indexes compiled by Bank of America Corp’s Merrill Lynch unit.
Bulls a Minority
Treasury bulls are in the minority. The 10-year yield will advance to 4.10 percent by year-end, according to a Bloomberg survey of banks and securities companies, with the most recent forecasts given the heaviest weightings.
“Starting in the second quarter, yields will rise,” said Masaaki Sugihara, who is in charge of foreign fixed income at Toyota Asset Management Co. in Tokyo, which has $12 billion in assets and is part of Japan’s biggest carmaker. “I don’t think there will be another recession. The Federal Reserve will raise rates.”
Futures contracts on the Chicago Board of Trade show traders see a 77 percent chance the central bank will increase the target by at least a quarter percentage point by November. The central bank cut its target for overnight loans to a range of zero to 0.25 percent in December 2008.
Fed Bank of Philadelphia President Charles Plosser said policy makers must raise the benchmark interest rate “well before” unemployment falls to an acceptable level in order to keep inflation in check, in a speech yesterday in Philadelphia.
Treasuries advanced yesterday as the three-year notes drew a yield of 1.49 percent, compared with a forecast of 1.513 percent in a Bloomberg News survey of four of the Fed’s primary dealers, which are required to bid at government bond auctions.
Investors bid for 2.98 times the amount available, compared with an average of 2.78 for the past 10 sales.
‘Decent Auction’
“The decent auction shows there is still demand for Treasuries, especially with weaker stocks and uncertainty in the economy,” said Lawrence Dyer, an interest-rate strategist in New York at HSBC Securities USA Inc., one of the primary dealers. “With the two-year locked in by the Federal Reserve, people are forced out the curve to get yield.”
Two-year rates tend to track the Fed’s target for overnight lending because of their short maturity. Yields on longer-term bonds are more influenced by inflation and the size of the U.S. debt.
To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.
