BLBG: Treasuries Advance as Stock Declines Boost Demand for Safety
By Lukanyo Mnyanda
Nov. 3 (Bloomberg) -- Treasuries rose as stock markets declined across the world on indications banks are struggling to shake off the effects of the financial crisis, boosting demand for the relative safety of fixed-income assets.
The gains pushed the 10-year yield to the lowest level since Oct. 21 as UBS AG reported a wider-than-estimated third- quarter loss and the U.K. said it will pump more money into Royal Bank of Scotland Group Plc, making it the costliest bank bailout worldwide. Treasuries rose even after a U.S. report yesterday showed manufacturing expanded. The MSCI World Index of stocks lost 1 percent.
“It seems equities are not convinced by the recovery story and the uncertainty is being reflected in bond markets being resilient,” said Orlando Green, assistant director of capital- markets strategy in London at Calyon, the investment-banking unit of Credit Agricole SA. “Investors are looking at the path ahead and it’s looking uncertain, which pushes you toward Treasuries.”
The 10-year note yield declined 3 basis points to 3.38 percent as of 6:20 a.m. in New York after earlier falling to 3.37 percent, according to BGCantor Market Data. The 3.625 percent security maturing in August 2019 rose 9/32, or $2.81 per $1,000 face amount, to 102 1/32. The two-year yield dropped 3 basis points to 0.89 percent.
UBS, Switzerland’s largest bank, posted its fourth consecutive loss and Metro AG, Germany’s largest retailer, said its earnings in the third quarter slumped 61 percent. The U.K. government agreed to give RBS and Lloyds Banking Group Plc 31.3 billion pounds ($51 billion) in their second bailout. That will push the government’s investment in Edinburgh-based RBS to 45.5 billion pounds, more than the $45 billion the U.S. pumped into Citigroup Inc.
‘Far From Robust’
The U.S. banking system is still “far from robust,” hurt by a decline in commercial real estate values and threatened by rising prospects for defaults on such loans, Jon Greenlee, associate director of the Federal Reserve’s Division of Banking Supervision and Regulation in Washington, said yesterday.
Europe’s Dow Jones Stoxx 600 Index lost 1.9 percent. Futures on the Standard & Poor’s 500 Index declined 0.5 percent, signaling that the gauge may reverse its 0.9 percent advance yesterday. Stocks rose yesterday as Ford Motor Co.’s profit and measures of home sales and construction spending also exceeded projections.
The Fed will probably leave its benchmark rate at a range of zero to 0.25 percent tomorrow, according to all 95 economists in a Bloomberg survey. The Federal Open Market Committee may repeat its pledge to keep interest rates low for an “extended period,” said Adam Carr, a senior economist at ICAP Australia Ltd. in Sydney.
Government Borrowing
The U.S. Treasury Department cut its estimate for government borrowing in the current quarter by 43 percent largely because of reductions in a program for helping the Fed manage its balance sheet.
Borrowing will total a net $276 billion from October through December, compared with a previous estimate of $486 billion, and it projects borrowing of $478 billion in the three months to March 31, the department said in a statement yesterday in Washington. In the quarter that ended Sept. 30, the Treasury borrowed $393 billion compared with $406 billion projected three months ago.
Gains by bonds may be limited before a report economists say will show factory orders rebounded in September from a decline in August, fueling concern the government will struggle to find buyers for record bond issuance this year. The Treasury is scheduled to announce tomorrow how much it plans to raise in note and bond sales next week.
‘Negative on Treasuries’
“We continue to be negative on Treasuries and don’t see big value,” said Michael Markovic, a senior fixed-income strategist at Credit Suisse Group AG in Zurich. “If inflation expectations remain anchored, then there’s less potential to be really positive on the bond market.”
U.S. factory orders climbed 0.8 percent in September after a 0.8 percent decline in August, a Bloomberg News survey of economists showed before the Commerce Department releases the report in Washington.
The government will sell $40 billion of three-year notes, $25 billion of 10-year debt and $16 billion of 30-year bonds, according to the average forecasts of six of the primary dealers that will bid on the three auctions. The amounts would all be records, according to data compiled by Bloomberg.
Annual Loss
U.S. government securities handed investors a loss of 2.6 percent in 2009, heading for their first annual drop in a decade, according to Merrill Lynch & Co.’s U.S. Treasury Master index. German bonds returned 1.9 percent, the indexes show.
The difference between rates on 10-year notes and Treasury Inflation Protected Securities, which reflects the outlook among traders for consumer prices, was little changed at 2.03 percentage points.
Government bond market participants’ expectations for deflation, or an extended and broad decline in U.S. consumer prices, have fallen sharply since the end of last year, according to a Fed Bank of San Francisco report.
Investors took the Fed’s decision in December to start purchasing Treasury securities “as a sign that the Federal Reserve would use all available tools to prevent sustained deflation,” according to the report yesterday by Jens Christensen, an economist at the bank.
To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net
