BLBG: Treasuries Little Changed as Stocks Gain, Libor Extends Decline
By Wes Goodman
Aug. 14 (Bloomberg) -- Treasuries were little changed, halting yesterday’s gain, as a global rally in stocks and declining short-term borrowing costs cut demand for the relative safety of government debt.
Notes slid initially before a Federal Reserve report that economists said will show U.S. industrial production rose for the first time in nine months in July. The difference between three-month Libor and the overnight indexes swap rate narrowed to 25 basis points yesterday, a level former Federal Reserve Chairman Alan Greenspan said he regarded as “normal.”
“Stock-market strength is being sustained, and there is a normalization of the credit markets,” said Hidehiko Maejima, international bond strategist in Tokyo at BNP Paribas Securities Japan Ltd., the arm of a U.S. primary dealer that trades directly with the Fed. “That is weighing on the bond market.”
The yield on the 10-year note rose two basis points to 3.61 percent as of 6:54 a.m. in London, according to BGCantor Market Data. The 3.625 percent security maturing in August 2019 fell 1/8, or $1.25 per $1,000 face amount, to 100 1/8.
Ten-year yields declined a quarter percentage point this week, the most since the period ended March 20. They will climb to 3.79 by year-end, according to a Bloomberg survey of banks and securities companies, with the most recent forecasts given the heaviest weightings.
Annual Loss
Government securities handed investors a loss of 4.3 percent so far this year, according to Merrill Lynch & Co.’s U.S. Treasury Master index, versus a 19 percent return for stocks on the MSCI World Index.
MSCI’s Asia Pacific Index of regional shares rose 0.4 percent today as economists said the Fed report will show U.S. output at manufacturers, mines and utilities climbed 0.4 percent last month. Treasuries trimmed losses as the index gave up earlier gains of as much as 1 percent.
The yen advanced against the euro and the dollar on speculation Japanese companies are bringing back earnings on overseas assets. The U.S. will make $79.2 billion in redemption and coupon payments for Treasuries on Aug. 17, according to estimates by Bank of Tokyo-Mitsubishi UFJ Ltd.
The Fed has more than doubled the size of its balance sheet in the past 12 months to $2.02 trillion by purchasing Treasuries and other securities to thaw credit markets that froze last year.
Fed officials have started to phase out such programs, deciding this week to let a $300 billion program to buy long- term Treasuries expire in October.
Libor Record
Yields indicate the central bank’s measures are generating some successes.
The London interbank offered rate, or Libor, for three- month dollar loans fell to a record 0.44 percent yesterday. Libor is about 19 basis points more than the upper end of the Fed’s target rate for overnight loans, narrowing from last year’s high of 3.32 percentage points in October.
The spread between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, was 0.27 percentage point, close to the least since March 2007.
The Libor-OIS spread was 25 basis points today. Geenspan said in a June 2008 interview he wouldn’t consider credit markets back to “normal” until the spread narrowed past that level.
U.S. 30-year fixed mortgage rates declined to 5.38 percent from this year’s high of 5.74 percent in June. They were as low as 4.85 percent in April, according to Bankrate.com in North Palm Beach, Florida.
Consumer Prices
The Labor Department will say today that U.S. consumer prices fell 1.9 percent in July from a year earlier, the most since January 1950, the Bloomberg surveys show.
A decline of that amount would mean 10-year notes offer a so-called real yield, of 5.51 percent. It would be the most since October 1987, the same month that the Standard & Poor’s 500 Index fell 22 percent, according to data compiled by Bloomberg.
The difference between rates on 10-year notes and Treasury Inflation Protected Securities, which reflects the outlook among traders for consumer prices, was 1.80 percentage points, the least in a week. The five-year average is 2.20 percentage points.
Treasuries rose yesterday after a government report showing an unexpected drop in retail sales suggested inflation is restrained, helping to spur higher-than-forecast demand at a record $15 billion auction of 30-year bonds.
The benchmark 30-year bond drew a yield of 4.541 percent, below the 4.556 percent forecast in a Bloomberg News survey of eight of the Fed’s primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with amount of securities offered, was 2.54, compared with an average of 2.36 at the last 10 auctions.
‘Good Demand’
The auction was the last sale of three auctions of coupon- bearing debt this week totaling $75 billion.
“There is still good demand for long-dated Treasuries amid the weak economy,” said Ira Jersey, an interest-rate strategist at RBC Capital Markets in New York, one of 18 primary dealers, those companies that are required to bid at Treasury auctions.
The retail sales figure combined with demand for Treasuries may send 10-year yields down to 3.5 percent by month-end, BNP’s Maejima said.
To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.
