BLBG: Treasuries Rise as Yields Near 6-Month High Lure on Fed Outlook
Treasuries gained as benchmark yields near a six-month high attracted investors amid speculation the Federal Reserve will signal next week that it’s considering adding to its $600 billion program of debt purchases.
Ten-year notes climbed following the biggest two-day slump in two years as the extra yield offered by 10-year Treasuries over Japanese bonds widened to the most in five months, boosting the allure of U.S. assets. Fed policy makers will next meet Dec. 14 after announcing their program of Treasury purchases at their last gathering on Nov. 3. Thirty-year bonds were little changed before the Treasury auctions $13 billion of the securities today, completing the week’s $66 billion of note and bond sales.
“Treasuries are finding some support after the sharp selloff,” said Kornelius Purps, a fixed-income strategist at UniCredit SpA in Munich. “There are some expectations that the Fed could expand its quantitative-easing program at next week’s meeting. The 30-year auction poses a risk, but it could be a supportive factor afterwards, as yields around 4.5 percent may represent a buying opportunity.”
The yield on the benchmark 10-year note fell four basis points to 3.24 percent as of 9:39 a.m. in London, according to data compiled by Bloomberg. The 2.625 percent security maturing in November 2020 rose 10/32, or $3.13 per $1,000 face amount, to 94 27/32. The yield climbed to 3.33 percent yesterday, the highest level since June 4.
The 30-year yield was little changed at 4.45 percent, after rising to 4.50 percent yesterday, the most since May 13.
Ten-year yields jumped 35 basis points over the past two days, the biggest such increase since September 2008, when financial markets were roiled by the bankruptcy of Lehman Brothers Holdings Inc.
‘Certainly Possible’
Buying more U.S. government bonds than already announced is “certainly possible,” Fed Chairman Ben S. Bernanke said in an interview broadcast Dec. 5 on CBS Corp.’s “60 Minutes” program. “It depends on the efficacy of the program” and the outlook for inflation and the economy, Bernanke said.
Some economists said Fed officials may signal an intention to curb any rapid gains in yields. The central bank’s debt purchases are intended to reduce long-term interest rates, making it cheaper for firms to buy new equipment and for consumers to purchase houses and cars.
“Financial markets, in particular long-term yields, have risen this far, so the Fed may discuss ways of communication that would calm them,” said Hiroki Shimazu, an economist in Tokyo at Nikko Cordial Securities Inc., a unit of Sumitomo Mitsui Financial Group Inc., Japan’s third-largest publicly traded bank by assets. “They might put such communication into the statement should rises in yields become too one-sided.”
Extra Yield
The extra yield, or spread, offered by 10-year Treasuries over similar-maturity Japanese bonds increased to 2.04 percentage points yesterday, the widest since June 15. Japan’s 10-year yields rose as high as 1.27 percent today, the most since June 4. The spread was 2 percentage points today.
“Yields well above 3 percent are likely to be very attractive to Japanese investors,” said Satoshi Okumoto, who helps manage the equivalent of $68 billion as a general manager at Fukoku Mutual Life Insurance Co. in Tokyo. “We may see buying from them.”
Treasuries have handed investors a 5.8 percent return this year, according to Bank of America Merrill Lynch data. Japanese debt has risen 1.3 percent, the indexes show.
The gain in Treasuries was tempered before a U.S. report today that economists said will show jobless claims fell.
‘Massive Sell-Off’
Jobless claims likely declined by 11,000 to 425,000 in the week ended Dec. 4, according to a Bloomberg survey before the Labor Department report. The Thomson Reuters/University of Michigan preliminary index of consumer sentiment rose to 72.5 in December from 71.6 the prior month, a separate Bloomberg survey showed before the figures are released tomorrow.
“Good economic news may keep Treasuries around these levels or push them north, but the sell-off will probably run out of steam not far from here,” said Roger Bridges, who oversees the equivalent of $15.7 billion in Sydney as head of fixed-income at Tyndall Investment Management Ltd., part of Australia’s largest insurer.
The 30-year bonds to be sold today yielded 4.44 percent in pre-auction trading, compared with 4.32 percent at the prior sale on Nov. 10. Investors bid for 2.31 times the amount offered last month, compared with 2.49 times on Oct. 14.
‘Dicey’ Auction
“A 30-year auction after a massive sell-off can be a little bit dicey,” Bridges said.
At yesterday’s 10-year auction, the securities drew a yield of 3.34 percent, compared with the average forecast of 3.307 percent in a Bloomberg News survey of primary dealers, companies obligated to bid at the government’s debt sales.
Ten-year Treasury note futures may drop below 119 after breaking below 121 14/32-121 16/32, a key support area, Societe Generale SA said, citing technical indicators.
The drop that “started at 128 1/32 in early November is likely to be stronger than what we thought initially,” SocGen technical analysts Hugues Naka and Fabien Manac’h in Paris wrote in a research note today.
The Treasury 10-year note futures contract expiring in March 2011 was little changed at 120 24/32. It reached 120 4/32 yesterday, the lowest level since June 22, Bloomberg data show.
The difference between yields on U.S. 10-year notes and those on Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the securities known as the break-even rate, was little changed at 2.21 percentage points today after increasing to as much as 2.29 percentage points yesterday, the widest since May 13.
To contact the reporters on this story: Keith Jenkins in London at kjenkins3@bloomberg.net; Ron Harui in Tokyo at rharui@bloomberg.net.
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
