BLBG: Treasuries Fall Before Services Report as Gross Favors Germany
By Matthew Brown and Wes Goodman
Jan. 6 (Bloomberg) -- Treasuries fell for the first time in three days before private reports on U.S. service industries and company employment that economists said will show the U.S. recovery is gaining momentum.
The drop lifted the 10-year note’s yield from within a basis point of its lowest level in more than a week. Investors demanded additional yield to buy Treasuries instead of bunds after Bill Gross, who runs the world’s biggest debt fund at Pacific Investment Management Co., said the German securities may offer an alternative to U.S. bonds. The U.S. plans to sell 3- and 10-year notes, 30-year bonds and 10-year Treasury Inflation Protected Securities next week.
“The data globally has been pretty good and there’s fairly hectic supply in the U.S. next week, so the market has to make space for supply and the better data going forward,” said Moyeen Islam, a fixed-income strategist at Barclays Plc in London.
The 10-year note yield rose 3 basis points, or 0.03 percentage point, to 3.79 percent at 7:04 a.m. in New York, according to BGCantor Market data. The rate dropped yesterday to 3.75 percent, the lowest level since Dec. 24. The 3.375 percent security due in November 2019 fell 7/32, or $2.19 per $1,000 face amount, to 96 5/8.
Two-year yields climbed 4 basis points to 1.05 percent. Shorter maturities, which tend to track the Federal Reserve’s benchmark interest rate, are more attractive because the central bank has promised to keep borrowing costs down, said Tsutomu Komiya, who handles Treasuries in Tokyo at Daiwa Asset Management Co., which oversees the equivalent of $77 billion.
Services Report
The Tempe, Arizona-based Institute for Supply Management’s index of non-manufacturing businesses, which account for almost 90 percent of the economy, rose to 50.5 in December from 48.7 in the previous month, according to the median estimate of 67 economists in a Bloomberg News survey. A separate report from Roseland, New Jersey-based ADP Employer Services may show companies cut the fewest jobs last month since January 2008.
After rallying 14 percent in 2008, when credit markets froze, Treasuries fell 3.7 percent on average last year, based on indexes compiled by Bank of America Merrill Lynch. Investors shunned government debt while the U.S. raised a record $2.11 trillion selling securities amid signs that the worst economic slump since World War II is ending.
Gross, speaking in an interview with Time magazine published on its Web site yesterday, said there are a number of reasons to “have doubts” about Treasuries.
“I’d be careful about this continuing assumption that U.S. Treasuries are the place to go,” he said.
Gross on Risk
U.S. securities carry “sovereign risk,” and the dollar is “over-owned,” said Gross, who is based in Newport Beach, California. Demand from China, the largest overseas owner of U.S. debt, may wane, he said.
“We would probably try and substitute for our Treasuries with sovereign bonds of potentially higher quality,” Gross told Time. “Germany has problems, but it’s in a much better budget situation than the U.S. because of a constitutional amendment three months ago that forces a balanced budget in four years.”
German bonds returned 1.96 percent in 2009 while Treasuries fell, the Merrill Lynch indexes show.
Investors are demanding 39 basis points of extra yield to buy 10-year Treasuries instead of same-maturity German bunds. The spread was 49 basis points on Dec. 22, the widest level since July 2007.
U.S. Housing
U.S. two-year notes completed a two-day gain yesterday as pending home resales fell in November more than economists had estimated, signaling the industry whose slump led America into recession has yet to recover.
The Fed is scheduled to release the minutes from its Dec. 15-16 meeting today. Fed Chairman Ben S. Bernanke and his colleagues reiterated a pledge to keep the target rate at almost zero at the session.
Treasuries offer value after 10-year yields rose 64 basis points in December, the most in almost six years, said Andy Cossor, Hong Kong-based chief market strategist for Asia at Frankfurt-based DZ Bank, Germany’s fifth-largest lender.
“Buyers have come back,” Cossor said. “The level of yields is attractive. The Fed is in no hurry to raise rates, and you’ve still got low inflation.” Ten-year yields will fall to 3.7 percent in three months, he said.
The difference between yields on 10-year notes and Treasury Inflation Protected Securities, or TIPS, a gauge of trader expectations for consumer prices, widened to 2.38 percentage points from 0.29 percentage points a year ago.
To contact the reporters on this story: Matthew Brown in London at mbrown42@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net
