BLBG: Treasury Gap Between Two-, 10-Year Rates Is Near Most in a Week
By Wes Goodman
Jan. 7 (Bloomberg) -- The difference between two- and 10- year Treasury yields was near the most in a week as the Federal Reserve holds short-term interest rates at a record low while the U.S. prepared to sell its longest-maturity debt.
The government will sell $10 billion in 10-year Treasury Inflation Protected Securities on Jan. 11, $40 billion of three-year notes on Jan. 12, $21 billion of 10-year securities on Jan. 13 and $13 billion of 30-year debt on Jan. 14, according to Wrightson ICAP LLC, an economic advisory firm in Jersey City, New Jersey. The Treasury is scheduled to set the amounts today.
“The Fed’s accommodative stance will favor the short end,” said Tomohisa Fujiki, an interest-rate strategist at BNP Paribas Securities Japan Ltd. in Tokyo. “We have 10- and 30- year auctions next week, and that will push those yields higher.” BNP’s U.S. branch is one of the 18 primary dealers that are required to bid at U.S. debt sales.
The 10-year note yield was 3.83 percent as of 6:06 a.m. in London, according to data compiled by Bloomberg. The 3.375 percent security due in November 2019 was little changed at 96 10/32.
The rate is 2.81 percentage points more than two-year securities. The spread was 2.84 percentage points earlier today, the most since Dec. 28. It has increased from 1.68 percentage points a year ago.
The three-year sale amount estimated by Wrightson ICAP would match the most ever, while the rest of the auctions would fall short of records.
Pimco’s ‘Favorite’
Bill Gross, who runs the world’s biggest mutual fund at Pacific Investment Management Co., said 10-year yields may rise “30 to 40 basis points” as the U.S. expands borrowings, while speaking yesterday on Bloomberg Radio. Germany is Pimco’s “favorite” place to invest, said Gross, who is based in Newport Beach, California.
Outstanding U.S. public debt has climbed to a record $7.175 trillion as of November from $4.537 trillion in December 2007 as the government borrowed to fund economic stimulus programs and a record budget deficit.
That contrasts with Germany where a constitutional amendment requires a balanced budget by 2016, Gross said.
Fed Minutes
Fed policy makers maintained a pledge to keep interest rates low for an “extended period” following their meeting on Dec. 15-16. The promise is helping anchor yields on two-year notes, which tend to track the central bank’s target for overnight lending because of their short maturity.
The Fed is targeting a range of zero to 0.25 percent for overnight loans between banks.
Treasury 10-year notes fell yesterday, pushing yields higher, as the minutes of the December meeting showed some policy makers said more stimulus “might become desirable” and the U.S. prepared to announce next week’s auction sizes.
“The Fed’s actions are saying there’s a need to have the ability to be able to re-stimulate,” said William Larkin, a fixed-income portfolio investor in Salem, Massachusetts, at Cabot Money Management, which oversees $500 million. “They are still leaning on the gas pedal so there will be fear of inflation.”
‘Fed’s Domain’
Overseas central banks are helping keep short-term rates low, said Dan Fuss, vice chairman of Boston-based Loomis Sayles & Co. which oversees $138.9 billion.
The market for short-maturity Treasuries “is really the Fed’s domain, the Fed and its friends, who are essentially overseas central banks buying Treasury bills,” Fuss said yesterday on Bloomberg Television.
Rising 10-year yields will lure investors, he said. “Let’s say that budges up 20 basis points. That starts to draw money in,” he said.
The two- to 10-year spread, known as the yield curve, widened to a record 2.88 percentage points on Dec. 22.
The curve indicates the chance of a U.S. recession by yean-end is “very low,” according to a report Jan. 5 by Joseph Haubrich and Kent Cherny, researchers at the Fed Bank of Cleveland.
A steep curve indicates strong growth and a flat one suggests a weak expansion, the report said. A sloping yield curve gives banks incentive to borrow at short-term rates and make longer-maturity loans, providing stimulus to the economy.
Fed officials differed over the inflation outlook, the minutes showed. Some officials said “quite elevated” slack in the economy would damp prices, while others saw a risk of inflation from the Fed’s “extraordinary” stimulus, the central bank 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 2.40 percentage points from 0.517 percentage points a year ago.
Inflation will be “fairly low” in the U.S. this year, said Bob Doll, chief investment officer for global equities at BlackRock Inc. in New York, the world’s biggest money manager with about $3.2 trillion in assets. American stocks will outperform cash and Treasuries, he said on Bloomberg Television yesterday.
To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.
