BLBG: Treasuries Drop as Stocks Rise on Signs of Economic Improvement
By Lukanyo Mnyanda and Wes Goodman
March 8 (Bloomberg) -- Treasuries fell, pushing 10-year yields to the highest level in almost two weeks, as a rally in stocks fueled concern the U.S. may struggle to find buyers for $74 billion of securities this week as the economy recovers.
Traders added to bets the Federal Reserve will raise interest rates before a report on March 12 that economists say will show consumer confidence improved. Demand for the safest assets waned as French President Nicolas Sarkozy said the euro region is ready to help Greece should the government struggle to fund its budget deficit. The MSCI World Index of shares extended last week’s 3.3 percent advance, the biggest gain since October.
“With equities on the front foot, this obviously gives Treasuries a tough time,” said David Schnautz, a fixed-income strategist at Commerzbank AG in Frankfurt. “And we also have supply hitting the Treasuries space. This is obviously something the market has to make room for.”
The yield on the benchmark 10-year note climbed 2 basis points to 3.70 percent as of 9:48 a.m. in London, according to BGCantor Market Data. It earlier advanced to 3.71 percent, the highest since Feb. 23. The 3.625 percent security due February 2020 slid 4/32, or $1.25 per $1,000 face amount, to 99 12/32.
The MSCI Asia Pacific Index of shares gained 2 percent, the most in two weeks, and the Stoxx Europe 600 Index rose for a seventh consecutive day, climbing 0.1 percent.
‘Flattening’ Yield Curve
Investors should position themselves for a so-called flattening in the yield curve as signs of an economic recovery prompt traders to sell shorter-dated notes, said Schnautz, who forecast that the difference in yield between two- and 10-year notes will narrow about 45 basis points by the end of June.
The spread between two- and 10-year yields shrank as low as 2.73 percentage points on March 5 as rates on shorter maturities climbed faster than those on longer-term debt. The spread reached a record 2.94 percentage points reached Feb. 18. It was at 2.79 percentage points today.
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 the size of the government’s debt and the outlook for inflation.
The Reuters/University of Michigan index of consumer sentiment for March probably increased to 73.8 from 73.6 in February, according to the median prediction of 48 economists surveyed by Bloomberg before the March 12 release.
Interest Rates
Futures contracts on the CME Group Inc. exchange showed a 43 percent probability that Fed policy makers will raise the target rate for overnight loans between banks by September, up from 32 percent odds a week ago.
The Fed’s benchmark has been at a range of zero to 0.25 percent since December 2008.
Toyota Asset Management Co. dropped its forecast for a bond-market rally after a March 5 report showed the U.S. lost fewer jobs than economists anticipated.
“Treasury yields will rise,” said Masaaki Sugihara, who helps oversee $12 billion in assets as head of foreign debt in Tokyo at Toyota Asset, a unit of the world’s biggest carmaker. “The U.S. economy is improving, and that will continue.”
The Treasury is scheduled to sell $40 billion in three-year notes tomorrow, $21 billion in 10-year debt the following day and $13 billion in 30-year bonds on March 11. The three-year sale ties a record.
‘No Doubt’
“I want to be very clear: if it were necessary, the states of the euro zone would fulfill their commitments,” Sarkozy said yesterday in Paris after a meeting with Greek Prime Minister George Papandreou. “There can be no doubt in this regard.”
“If there is a problem, then official money will be made available” from either the European Union or the International Monetary Fund, Erik F. Nielsen, chief European economist at Goldman Sachs Group Inc. in London, wrote in an e-mailed note yesterday. Goldman Sachs helped Greek officials raise $1 billion of off-balance-sheet funding in 2002.
Treasuries are drawing demand from municipal bond investors, who are buying as state and local government finances worsen and the yield advantage for tax-exempt securities evaporates.
Local government bonds due in three years with AAA ratings yielded 66 percent of similar maturity Treasuries last month, about the lowest level since Bloomberg began compiling the data in 2001. If the ratio moves closer to 60 percent, investors in the 38.3 percent federal tax bracket would lose all the benefits of sheltering income that comes from municipal debt.
‘Treasuries are Safer’
Municipal bonds are losing favor as state and local governments raise taxes to fund the record $18.5 billion in budget gaps estimated in a National Governor’s Association survey. Increased buying by tax-exempt investors would aid short-maturity Treasuries, which benefitted this year from demand for a refuge from sovereign credit concerns.
“Treasuries are safer and more liquid investments, especially given the quality issues with many municipalities of late,” said Jeffrey Schoenfeld, partner and chief investment officer in New York at Brown Brothers Harriman & Co., which manages $33 billion in assets.
Investors became less bearish on U.S. government debt last week, according to a survey by Ried Thunberg ICAP Inc., a unit of ICAP Plc, the world’s largest inter-dealer broker.
The company’s index measuring the outlook for Treasuries through the end of this month rose to 45 for the week ended March 5 from 43 in the prior period. A figure of less than 50 shows investors expect prices to fall. The company, based in Jersey City, New Jersey, interviewed 27 fund managers controlling $1.42 trillion.
To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net
