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BLBG: Treasuries Rise for Third Day as Japan’s Economy Shrinks
 
Treasuries rose for a third day after Japan’s economy unexpectedly sank into a recession, spurring demand for the safest assets.

The 10-year yield touched the lowest in a week as a report showed Japan’s gross domestic product contracted an annualized 1.6 percent in the three months through September, versus the median forecast for 2.2 percent growth in a Bloomberg News survey of economists. Treasuries also gained as stocks around the world fell after Chinese banks reported the biggest jump in bad loans last quarter since 2005.

“It’s fair to say the third-quarter GDP data out of Japan was the primary driver” for the move higher in Treasuries, said John Davies, a U.S. interest-rate strategist at Standard Chartered Bank in London. “That plays into all the background global growth and disinflation concerns that are bubbling away.”

Benchmark U.S. 10-year yields declined two basis points, or 0.02 percentage point, to 2.30 percent as of 6:57 a.m. New York time, according to Bloomberg Bond Trader data. The rate earlier touched 2.28 percent, the least since Nov. 10. The 2.25 percent note due November 2024 rose 6/32, or $1.88 per $1,000 face amount, to 99 18/32.

Japan’s Topix (TPX) index of shares fell 2.5 percent, while the Stoxx Europe 600 Index slid 0.3 percent.

Economic Divergence

Japan is the latest nation to show signs of weakness as the U.S. economy expands, generating demand for Treasuries as yields fall in Europe and Japan while the dollar rallies.

U.S. government securities due in a decade and longer have returned 19 percent in 2014. It’s the biggest return in dollar terms among 144 bond indexes around the world tracked by Bloomberg and the European Federation of Financial Analysts Societies.

“You’re going to sell risky assets,” said Kazuaki Oh’e, a debt salesman at CIBC World Markets Japan Inc. in Tokyo. “That money will automatically go to safety markets, which is the bond market.”

The Bank of England lowered its U.K. growth and inflation forecasts last week because of a “moribund” global expansion.

European Central Bank Executive Board member Yves Mersch said Nov. 11 the ECB will be ready to buy asset-backed securities this week as part of its stimulus plan. China reported Nov. 15 that bad loans jumped in the third quarter. The Standard & Poor’s GSCI Index (SPGSCI) of commodity prices fell to a four-year low last week.

‘Underlying Bid’

“There’s an underlying bid to the Treasury market,” said Ali Jalai, a bond trader in Singapore at Scotiabank, a unit of Bank of Nova Scotia, one of 22 primary dealers that trade directly with the Fed. “Whether it’s a little bit of weakness in China, weakness in Japan, commodity weakness, weakness in Europe, other than the U.S., you can find fault everywhere.”

The extra yield 10-year Treasuries offer over similar-maturity U.K. gilts widened to 20 basis points last week, the most in 15 months.

The premium over German 10-year bunds was 151 basis points, after expanding to 157 in September, which was the widest difference in 15 years.

Data today will show manufacturing in New York state picked up in November, based on a Bloomberg survey of economists. Nationwide growth in industrial production slowed to 0.2 percent in October from 1 percent in September, based on responses from economists.

The Fed plans to issue the minutes of its latest meeting on Nov. 19.

“The economy continues to recover,” said Hiroki Shimazu, the senior market economist in Tokyo at SMBC Nikko Securities Inc., a unit of Japan’s second-largest publicly traded bank. “The Fed continues to think about hiking rates, not today, but sometime next year.” The benefit is that Treasuries will keep attracting funds from abroad, he said.

The Fed has kept the target for the federal funds rate, which banks charge each other on overnight loans, in a range of zero to 0.25 percent since December 2008.

The implied yield on 30-day fed fund futures contracts expiring in December 2015 was 0.53 percent, the first month that prices in a quarter-point increase.

To contact the reporters on this story: David Goodman in London at dgoodman28@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net

To contact the editors responsible for this story: Paul Dobson at pdobson2@bloomberg.net Keith Jenkins
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