BLBG: Treasuries Gain a Third Day as South Korea Drills Boost Demand for Safety
Treasuries advanced for a third day, the longest run of gains this month, as escalating tensions on the Korean peninsula drove investors to the perceived safety of U.S. government debt.
Bonds also rose as yields about one percentage point higher than this year’s low attracted buyers. South Korea said a live- fire drill today was completed without incident after threats of retaliation from North Korea. The Federal Reserve is scheduled to buy as much as $17 billion of Treasuries due between 2014 and 2020 today.
“The thing in Korea is of course something that markets are aware of and lying in the background,” said Rasmus Rousing, a fixed-income strategist at Credit Suisse Group AG in Zurich. “Any kind of global crisis will trigger a rally in Treasuries.”
The yield on the benchmark 10-year note slipped one basis point to 3.32 percent as of 6:03 a.m. in New York, according to BGCantor Market Data. The 2.625 percent security due in November 2020 gained 3/32, or $0.94 per $1,000 face amount, to 94 5/32.
Treasuries rallied Dec. 16 and Dec. 17, pushing 10-year yields down by 20 basis points, or 0.20 percentage point. The yield climbed to 3.56 percent on Dec. 16, from the low this year of 2.33 percent on Oct. 8.
Ten-year rates will drop to 2.98 percent by March 31, according to a Bloomberg survey of financial analysts with the most recent forecasts given the heaviest weightings.
Live-fire drills “would make it impossible to prevent the situation on the Korean peninsula from exploding,” North Korea’s state-run Korean Central News Agency cited the Ministry of Foreign Affairs as saying on Dec. 18.
Flattening Curve
U.S. government bonds fell this month as the gap between yields on longer-maturity Treasuries showed the Fed’s purchases, its second round of quantitative easing, may be its last.
The difference between 10- and 30-year yields shrank to 1.05 percentage points on Dec. 15 from a record 1.60 points on Nov. 10, the fastest contraction since the 1980s, according to data compiled by Bloomberg. The shift in the so-called yield curve is taking place as Bank of America Merrill Lynch index data show U.S. bonds due in 10 years or more lost 4.64 percent this month, trimming 2010’s gain to 8.37 percent.
Flattening usually foreshadows the end of Fed interest-rate cuts aimed at stimulating growth. U.S. reports this month showed gains in retail sales, consumer confidence and industrial production after the central bank expanded its balance sheet to an unprecedented $2.39 trillion, pumping money into the financial system. It’s adding $600 billion more, purchasing Treasuries through so-called quantitative easing.
End of Cycle
“A peak in the yield spread between 10s and 30s signals the end of an easing cycle,” said Steven Wieting, managing director of economic and market analysis at Citigroup Inc. “It’s part of a recovery and improved growth expectations. If the outlook is for a stronger recovery, then QE would be limited and they may not expand beyond it.”
The U.S. economy expanded at a 2.8 percent annual pace in the third quarter, quicker than the 2.5 percent estimate published last month, the Commerce Department will say Dec. 22, according to a Bloomberg News survey. Spending by consumers rose 0.5 percent in November after a 0.4 percent increase in October, a separate survey showed before the Dec. 23 report.
“The economy continues to recover,” said Hiroki Shimazu, a Tokyo-based economist at Nikko Cordial Securities Inc., part of Sumitomo Mitsui Financial Group Inc., Japan’s third-largest publicly traded bank by assets. “Fear of deflation will gradually disappear. It will push up yields.”
Less Bearish Outlook
The 10-year rate may rise to 3.5 percent by June 30, Shimazu said.
The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the securities, widened to 2.29 percentage points from this year’s low of 1.47 percentage points in August. The five-year average is 2.09 percentage points.
Fund managers in a weekly survey by Ried Thunberg ICAP Inc. became less bearish on the outlook for Treasuries through March.
Ried’s sentiment index rose to 48 for the seven days ended Dec. 17 from 46 the week before. A figure less than 50 indicates investors expect prices to fall. The company, which is a unit of the world’s largest interdealer broker and is based in Jersey City, New Jersey, surveyed 26 money managers controlling $1.38 trillion.
To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net.
To contact the editors responsible for this story: Daniel Tilles at dtilles@bloomberg.net; Rocky Swift at rswift5@bloomberg.net.
