BLBG: Treasuries Fall as Likely Bernanke Reappointment Reduces Risk
By Wes Goodman and Paul Dobson
Jan. 25 (Bloomberg) -- Treasuries fell as investors bet Federal Reserve Chairman Ben S. Bernanke is almost certain to win confirmation for a second term after wavering political support spurred demand for the safest securities last week.
The decline pushed the 10-year note yield up from within 2 basis points of a one-month low last week, when some Democrats said they were undecided about Bernanke. David Axelrod, one of President Barack Obama’s senior advisers, and Senate Republican leader Mitch McConnell both said over the weekend that the central banker will keep his job.
“The market is pretty sure about Bernanke’s reappointment,” said Karsten Linowsky, a fixed-income strategist at Credit Suisse AG in Zurich. “You can take some of the uncertainty premium out of the price.”
The 10-year note yield increased 3 basis points to 3.63 percent as of 8:39 a.m. in London, according to data compiled by Bloomberg. The 3.375 percent security due in November 2019 fell 6/32, or $1.88 per $1,000 face amount, to 97 28/32. Yields declined to 3.58 percent on Jan. 22, the lowest since Dec. 21. Thirty-year bonds slid 3/32, pushing their yields up 1 basis point to 4.54 percent.
Bernanke has kept interest rates at a record low after the recession triggered $1.74 trillion of losses and writedowns at financial institutions worldwide. The assurances from Axelrod and McConnell followed declarations of support for Bernanke from the top two Senate Democrats, Harry Reid and Richard Durbin, who earlier said they were undecided.
The Senate plans to vote on the confirmation this week, an aide to Reid said. John McCain, the Republican 2008 presidential nominee, is among senators who oppose Bernanke.
GDP, Note Auctions
A U.S. report this week will probably show the world’s largest economy expanded in the last quarter of 2009 at the fastest pace in almost four years. The Treasury Department will auction a record-tying $118 billion of two-, five-and seven-year notes starting tomorrow.
Two-year yields climbed to 0.82 percent from a one-month low of 0.78 percent set Jan. 22. They will advance to 1.30 percent by March 31, analysts at JPMorgan Chase & Co. led by Srini Ramaswamy in New York said in a report Jan. 22.
“Front-end yields are back near the bottom of their recent ranges and well below our targets,” the JPMorgan Chase report said. “Short two-year Treasuries.” The company is one of the 18 primary dealers that are required to bid at the government’s debt sales. A so-called short is a bet prices will fall.
This week’s U.S. note auctions consist of a $44 billion two-year sale tomorrow, $42 billion of five-year debt the next day and $32 billion of seven-year securities on Jan. 28.
GDP Growth
President Obama has increased U.S. marketable debt to a record $7.27 trillion, borrowing to sustain the U.S. expansion after the biggest recession since the 1930s.
Gross domestic product expanded at a 4.6 percent pace from October through December, according to a Bloomberg News survey of economists before the report on Jan. 29.
“The GDP figure will be a good number,” said Kazuaki Oh’e, a bond salesman in Tokyo at Canadian Imperial Bank of Commerce, the nation’s fifth-largest lender. “It’s not good for long-term bonds because of inflation fears. If the markets rise, that’s a good time to set a short position before the auctions.”
The difference between yields on 10-year notes and Treasury Inflation Protected Securities, or TIPS, a gauge of trader expectations for consumer prices, rose 3 basis points to 233 basis points.
Volatility Bets
The spread between two- and 10-year yields was 2.80 percentage points, within 10 basis points of the record set Jan. 11. Two-year rates tend to track the Fed’s target for overnight lending because of their shorter maturity. Yields on longer-term bonds are more influenced by inflation and by the size of the government’s debt.
January’s rally in Treasuries may prove fleeting as options traders bet on bigger price swings in bonds and waning volatility in stocks for the first time since 2006.
Barclays Capital indexes show interest-rate volatility rose from a six-month low in November on speculation borrowing costs will increase as the improving economy allows the Fed to remove the unprecedented cash it pumped into the financial system. At the same time, confidence in the outlook for profits helped push the Chicago Board Options Exchange Volatility Index to an almost two-year low this month.
‘Secular Bull Low’
The correlation between the volatility indexes was negative in 2006, the last time policy makers were increasing the target rate for overnight loans between banks. Yields on 10-year Treasuries increased 0.75 percentage point in the first half of that year, sparking a loss of 3.9 percent, according to Bank of America Corp.’s Merrill Lynch indexes, while the Standard & Poor’s 500 Index rose 1.8 percent.
“We’ve probably seen the great secular bull low in yields,” said Mitchell Stapley, who helps oversee $13 billion of debt as chief fixed-income officer for Fifth Third Asset Management in Grand Rapids, Michigan. “The level of rates, what happens in the housing market, that’s on the forefront of people’s minds and why we are getting fixed-income volatility spikes that haven’t made it over to the equity markets.”
Ried Thunberg ICAP Inc.’s index measuring the outlook for Treasuries through the end of June shows investors became less bearish. The gauge climbed to 43 for the seven days ended Jan. 22 from 40 the week before.
A figure less than 50 shows investors expect prices to fall. The company, in Jersey City, New Jersey, interviewed 26 fund managers.
To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.netPaul Dobson in London at pdobson2@bloomberg.net
