BLBG: Treasuries Rise Before Report That May Show Prices Are Falling
Sept. 16 (Bloomberg) -- Treasuries rose for the first time in three days before a government report that economists said will show consumer prices in the U.S. are falling at close to the fastest pace since 1950.
Ten-year yields “risk” dropping with the inflation rate likely to set new lows in the months ahead, according to Goldman Sachs Group Inc. Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., increased holdings of government-related debt last month to the most in five years, according to the Pimco Web site. Federal Reserve Chairman Ben S. Bernanke said yesterday the worst recession since the 1930s has probably ended.
“The recession may be over but I think interest rates are likely to stay low for a while,” said Robin Marshall, director of fixed income at Smith & Williamson Investment in London. “I can’t get the view that yields are going to back up very far when the recovery is sub-par. Treasuries still offer good value at these levels.”
The yield on the benchmark 10-year note fell 4 basis points to 3.42 percent as of 9:15 a.m. in London, according to BGCantor Market Data. The 3.625 percent security due August 2019 rose 9/32, or $2.81 per $1,000 face amount, to 101 22/32. A basis point is 0.01 percentage point.
Consumer prices declined 1.7 percent in August from a year earlier, according to the median forecast in a Bloomberg News survey of economists before the Labor Department reports the figure. Prices fell 2.1 percent in July, the most since Harry S. Truman was U.S. president in 1950.
Federal funds futures contracts on the Chicago Board of Trade show just a 1.6 percent chance the central bank will raise interest rates by December.
Cost of Living
The cost of living rose 0.3 percent in August from July, the survey showed. Investors use the figures to gauge inflation, which eats away at a bond’s returns. Industrial production, reported by the Federal Reserve, climbed 0.6 percent in August from the month before, according to a separate Bloomberg survey.
Ten-year yields may fall toward 3 percent, according to Goldman Sachs. Investors may benefit by using futures to bet on gains in Treasuries, Goldman Sachs analysts Francesco Garzarelli and Michael Vaknin in London, wrote in a note to clients.
Gross boosted the $177.5 billion Total Return Fund’s investment in Treasuries, so-called agency debt and other bonds linked to the government to 44 percent of assets, the most since August 2004, from 25 percent in July, according to Pimco’s Web site. The fund cut mortgage debt to 38 percent, the lowest level since February 2007, from 47 percent.
Inflation Concern
Treasuries have returned 2.5 percent in the past three months, beating the 2.3 percent gain for mortgage-backed bonds, according to indexes compiled by Merrill Lynch & Co.
Former Fed Chairman Alan Greenspan said today he is worried that lawmakers will hamper the Fed’s efforts to guard against an inflation spurt.
“It’s the politics in the United States that worries me, whether the Congress will basically feel comfortable” with the Fed withdrawing its stimulus, Greenspan said in a broadcast to Tokyo clients of Deutsche Bank Securities Inc. He later said that “if inflation rears its head, it will swamp long-term markets,” referring to bonds.
The difference between rates on 10-year notes and Treasury Inflation Protected Securities, or TIPS, which reflects the outlook among traders for consumer prices, rose to 1.84 percentage points from almost zero at the end of last year. The spread is still below the five-year average of 2.19 points.
International Buyers
International buying of U.S. financial assets slowed in July, economists said before the Treasury Department reports the figure today. Net purchases of long-term notes, bonds and stocks fell to $60 billion from $90.7 billion in June, a Bloomberg survey of economists showed.
The Fed plans to buy notes maturing from August 2010 to April 2011 today, according to its Web site, as part of its plan to cap consumer borrowing costs. It purchased $2.05 billion of Treasuries due from February 2021 and August 2022 yesterday.
The central bank is scooping up as much as $300 billion of Treasuries to thaw the credit markets that froze last year, with the program scheduled to end in October.
Credit-market yields indicate the central bank is generating some success.
The London interbank offered rate, or Libor, for three- month dollar loans fell to a record low of 0.293 percent yesterday. It was as high as 4.82 percent in October, following the collapse of Lehman Brothers Holdings Inc. the month before.
Mortgage Rates
U.S. 30-year fixed mortgage rates have declined to 5.27 percent from this year’s high of 5.74 percent in June, according to Bankrate.com in North Palm Beach, Florida.
Treasury 10-year notes fell yesterday after a government report showed sales at U.S. retailers surged in August by the most in three years.
Prices paid to factories, farmers and other producers increased 1.7 percent last month from July, a separate report showed. Compared with a year earlier, companies paid 4.3 percent less for goods.
“We are still seeing year-over-year inflation declines,” said Brian Edmonds, head of interest rates at Cantor Fitzgerald LP in New York, another primary dealer. “The stronger numbers are nothing fatal to the bond market right now.”
To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net.
