BLBG: Treasuries Rise, Head for Weekly Advance, as Fed to Hold Rates
By Wes Goodman
Nov. 13 (Bloomberg) -- Treasuries rose, heading for a winning week, after President Barack Obama said the U.S. “desperately” needs jobs, bolstering expectations the Federal Reserve will keep borrowing costs at a record low.
Notes also gained as Asian stocks declined, following losses in oil and gold yesterday, which is feeding demand for the relative safety of government debt. The U.S. economy is “very fragile,” said Alan Krueger, assistant Treasury secretary for economic policy.
“Treasury yields will gradually decline,” said Hiromasa Nakamura, a Tokyo-based senior investor at Mizuho Asset Management Co., which oversees the equivalent of $21 billion and is part of Japan’s second-largest bank. “Inflation will be subdued for a long time. The Federal Reserve will continue with its low rate.”
The 10-year note yield fell two basis points to 3.43 percent as of 6:03 a.m. in London, according to BGCantor Market Data. The 3.375 percent security maturing in November 2019 rose 1/8, or $1.25 per $1,000 face amount, to 99 1/2.
Treasuries fell as the MSCI Asia Pacific Index of regional shares retreated 0.2 percent, following a 1 percent slide in the Standard & Poor’s 500 Index yesterday.
Oil for December delivery traded at $76.97 a barrel, near the lowest since Oct. 15. Gold for immediate delivery fell 1.2 percent yesterday and was little changed today.
Fed Rate
The Fed cut its target for overnight lending between banks to a range of zero to 0.25 percent in December to combat the steepest U.S. economic recession since the 1930s. The central bank repeated its pledge last week to keep interest rates near zero for an “extended period.”
Obama said yesterday he will convene business executives for a jobs forum next month at the White House. The unemployment rate in the U.S. soared to a 26-year high of 10.2 percent in October, a Labor Department report showed last week.
“We’re not out of the woods yet,” Krueger said yesterday. The labor market remains a “very severe challenge” and faces “substantial headwinds,” he said.
Yields indicate that inflation, which erodes the value of the fixed payments from bonds, will be about in line with the five-year average.
TIPs
The difference between rates on 10-year notes and Treasury Inflation Protected Securities, or TIPS, which reflects the outlook among traders for consumer prices, widened to 2.16 percentage points from about zero at the end of 2008. The average since November 2004 is 2.18 percentage points.
Ten-year notes yielded 4.73 percent after accounting for the cost of living in the U.S., compared with 15 basis points a year ago.
Wal-Mart Stores Inc., the world’s largest retailer, said yesterday it saw deflation across its businesses in the third quarter. Deflation is a general decline in costs.
The U.S. economy should be “on better footing” by the second half of 2010, said Chris Ahrens, head of interest-rate strategy at UBS Securities LLC in Stamford, Connecticut. The company is one of the 18 primary dealers that are required to bid at the Treasury sales.
The Fed may increase its benchmark rate to 0.75 percent and two-year yields may be 1.75 percent by the end of 2010, Ahrens said in an interview yesterday.
‘Real-Money Investors’
“Rates are going to have to adjust higher so that it draws in the real-money investors: the pension funds, the insurance companies, and the mom and pop investors in their 401(k)” retirement accounts, Ahrens said.
The University of Michigan will report today that its index of consumer confidence rose in November from October, according to the median estimate in a Bloomberg News survey of economists.
Treasuries gained yesterday as stocks fell and the U.S. completed this week’s three note and bond offerings, with a record $16 billion sale of debt maturing in 30 years.
“We’ve seen some buying after the auction,” said Carl Lantz, an interest-rate strategist in New York at Credit Suisse AG, another primary dealer.
The debt sold yesterday drew a yield of 4.469 percent, higher than the average forecast of 4.424 percent in a Bloomberg News survey of five primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.26, the least since May.
Debt Sales
The U.S. sold $81 billion of debt this week, including $40 billion in three-year notes on Nov. 9 and $25 billion of 10-year debt on Nov. 10, both records, as Obama borrows unprecedented amounts to fund his stimulus programs.
U.S. marketable debt stands at $6.95 trillion and reached a record $7.01 trillion in September. The government is scheduled to announce on Nov. 19 how much it plans to raise in two-, five- and seven-year sales over three days starting Nov. 23.
Treasury Secretary Timothy Geithner is seeking to lock in near-record-low borrowing costs by lengthening the average due date of the Treasury’s borrowings.
The 10-year yield has averaged 3.20 percent in 2009, the lowest since the Fed began providing daily data on the securities in 1962 and down from 3.64 percent for all of 2008.
Department officials on Nov. 4 announced a long-term target of six to seven years for the average maturity, barring unexpected borrowing needs. The average is currently about 53 months, according to Treasury data, below the historical average of about five years.
The increase in long-term debt has sent bond yields higher this year. The difference between two- and 30-year rates widened to 3.59 percentage points on Nov. 11, the most since July, according to Bloomberg data. Yields on shorter maturities are being anchored by the Fed’s target overnight rate.
Two-year notes returned 1.5 percent this year, while 30- year bonds handed investors a 23 percent loss, according to indexes compiled by Bank of America’s Merrill Lynch unit.
To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.
