BLBG: Treasury Yield Is Near Two-Week High Before $21 Billion Sale
By Wes Goodman
March 10 (Bloomberg) -- Treasury yields were near the highest level in two weeks as the U.S. prepared to sell $21 billion in 10-year notes today, the second of three auctions this week totaling $74 billion.
Investors should favor corporate bonds over Treasuries as President Barack Obama borrows record amounts to sustain the economic recovery, said Dan Fuss, whose Loomis Sayles Bond Fund beat 94 percent of competitors in the past year. The U.S. may add 300,000 jobs this month as businesses rebound from February’s blizzards, said analysts including Brian Wesbury, chief economist at First Trust Portfolios in Wheaton, Illinois.
“The job market will turn positive,” said Tsutomu Komiya, who helps oversee $77 billion as an investor at Daiwa Asset Management Co. in Tokyo. “That will make bond yields rise in April and May.” The company is part of Daiwa Securities Group Inc., Japan’s second-biggest investment bank.
The 10-year note yielded 3.70 percent as of 6:29 a.m. in London, according to data compiled by Bloomberg. The rate climbed to 3.73 percent on March 8, the most since Feb. 23. The 3.625 percent security due February 2020 traded at 99 13/32.
The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, widened to 2.23 percentage points from 2.18 percentage points a week ago. The spread has averaged 2.16 percentage point over the past five years.
This week’s auctions started with a three-year sale yesterday and will finish with a 30-year offering tomorrow. Obama increased the U.S. marketable debt to an unprecedented $7.41 trillion to fund a budget deficit the government predicts will swell to a record $1.6 trillion in the fiscal year ending Sept. 30.
Pre-Auction Trading
The 10-year notes scheduled for sale today yielded 3.71 percent in pre-auction trading, compared with 3.692 percent at the previous offer of the securities on Feb. 10.
Investors bid for 2.67 times the amount being sold last month, versus an average of 2.77 times for the past 10 auctions. Indirect bidders, the group that includes foreign central banks, bought 33.2 percent of the securities, versus the 10-sale average of 40.3 percent.
“The amount of borrowing is going up” and that will hurt Treasuries, Fuss said yesterday on Bloomberg Television. “Corporate yields are fair value or a little better relative to Treasuries,” said Fuss, who is vice chairman of Boston-based fund manager Loomis Sayles & Co.
Corporate Bonds
An index of U.S. company bonds compiled by Bank of America Corp. yields 2.73 percentage points more than Treasuries, narrowing from 8.09 percentage points 12 months ago as the economy recovered from last year’s recession. The spread was 1.42 percentage points at the start of 2007 before credit markets began to freeze later that year.
Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York, joined First Trust’s Wesbury in forecasting job gains. Payrolls may increase by 300,000 on average for the next three to four months, he said.
Treasury three-year notes rose yesterday as fund managers seeking a refuge in shorter-maturity government securities because of a debt crisis in Greece bolstered demand at the $40 billion auction.
Investors bid for 3.13 times the available securities, the highest level since November.
“There was good demand,” said Christian Cooper, an interest-rate strategist in New York at Royal Bank of Canada, one of 18 primary dealers along with Deutsche Bank that are required to bid at the government’s debt sales.
‘Extended Period’
Fed Bank of Chicago President Charles Evans said yesterday low interest rates are likely to be needed “for some time.”
Speaking to reporters after a speech in Arlington, Virginia, Evans said he expects the Fed to hold its target lending rate low for the next “three or four meetings” and reiterated his support for the central bank’s guidance that rates will stay low for an “extended period.”
The difference between two- and 10-year yields was 2.82 percentage points, after widening to a record of 2.94 percentage points on Feb. 18.
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.
To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.
