BLBG: Treasuries Gain as Yields Near 7-Month High Attract Before Fed Purchases
Treasuries rose, rebounding from the steepest decline in two weeks, as the Federal Reserve prepared to buy notes today and some investors said yields near a seven- month high are attractive.
Bonds stemmed the biggest monthly loss in almost two years as the Fed planned to buy $4 billion to $6 billion of debt due from June 2012 to June 2013 as part of its plan to spur the economy. The Treasury is scheduled to sell $29 billion of seven- year debt today, after a five-year auction yesterday that Bill Gross at Pacific Investment Management Co. called a “stinker.”
“We expect growth to pick up next year, but perhaps not at a pace that the Fed will be able to raise interest rates just yet especially when unemployment is still at the current level,” said Michael Leister, a fixed-income analyst at WestLB AG in Dusseldorf, Germany. “Bond yields may pick up next year but overall we are likely to remain in a relatively low-yield environment.”
Ten-year rates dropped five basis points to 3.44 percent as of 10:07 a.m. in London, according to data compiled by Bloomberg. The price of the 2.625 percent security due in November 2020 advanced 11/32, or $3.44 per $1,000 face amount, to 93 7/32.
The yield climbed 15 basis points yesterday. It was as high as 3.56 percent on Dec. 16, a level not seen since May.
December Slump
Today’s rally interrupted a rout that has sent Treasuries down 2.7 percent in December, the most since January 2009 according to Bank of America Merrill Lynch data. The figures show global debt fell for a fourth month, handing investors a 2.3 percent loss during the period.
Bond bears speculated economic growth will pick up in 2011, driven by the Fed’s second round of quantitative easing through Treasury purchases and President Barack Obama’s record borrowing.
“QE2 created a small bubble in the economy and the markets,” said Kei Katayama, who helps oversee the equivalent of $55.2 billion as leader of the foreign fixed-income group in Tokyo at Daiwa SB Investments Ltd., a unit of Japan’s second- biggest brokerage. “Stocks and commodities rose. That pushed yields up in the major markets.”
Katayama holds fewer Treasuries than the percentages in the indexes he uses to gauge performance.
The Thomson Reuters/Jefferies CRB Index of 19 commodities rallied more than 25 percent over the past four months, while the Standard & Poor’s 500 Index returned 20 percent.
Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York, said gross domestic product will expand at a pace of 3 percent to 3.5 percent in 2011. The rate was 2.6 percent in the third quarter.
‘Robust’ Growth
“Growth in general will be fairly robust,” Maki said yesterday on Bloomberg Television’s “Bottom Line” anchored by Pimm Fox. “We are favorable on the U.S. stock market.” Barclays is one of the 18 primary dealers that are required to bid at the government debt sales.
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 2.31 percentage points, from this year’s low of 1.47 percentage points in August. The five-year average is 2.09 percentage points.
Treasuries tumbled yesterday after the $35 billion five- year sale. Bids totaled 2.61 times the available amount, the least since June.
Indirect bidders, the investor class that includes central banks outside the U.S., purchased 35.6 percent of the notes, versus the average of 42.3 percent for the past 10 sales.
The sale was the second of three note auctions this week totaling $99 billion.
‘Fairly Bearish’
“That the U.S. Treasury has to come with $100 billion in the last week of the year, you know, it shows to a certain extent the corner that they’ve painted themselves into,” Pimco’s Gross, who runs the world’s biggest bond fund, said on CNBC yesterday. “They have to fund $1.25 trillion to $1.5 trillion deficits, and it simply shows the problems that the U.S. is encountering in terms of their deficit,” Newport Beach, California-based Gross said.
Morgan Stanley said it is “fairly bearish” on today’s seven-year sale, in a report to clients yesterday by analysts including Jim Caron in New York. “We would expect the market to continue to sell off,” according to Morgan Stanley, another primary dealer.
Consumer Confidence
The seven-year notes yielded 2.89 percent in pre-auction trading, rising from 2.253 percent at the previous sale of the securities on Nov. 24.
Investors bid for 2.63 times the amount of debt offered last month, declining from the average of 2.88 for the past 10 auctions. Indirect bidders purchased 42.2 percent of the securities, versus the 10-sale average of 48.5 percent.
A private report yesterday showing a decline in consumer confidence supported the case for yields to fall.
Ten-year rates will slide to 3.10 percent by March 31, according to a Bloomberg survey of banks and securities companies, with the most recent forecasts given the heaviest weightings.
To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net.
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net.
