BLBG: U.S. 2- to 30-Year Yield Spread Near Widest on Record Before GDP Report
The difference between U.S. 2- and 30-year yields was near the widest on record on speculation a report today will show economic growth is quickening, spurring investors to demand greater compensation for potential inflation.
Moody’s Investors Service said its time frame for possibly placing a negative outlook on its Aaa rating for U.S. Treasury bonds is shortening as the country’s deficit widens. The cost to protect Treasuries from losses using credit-default swaps climbed for a fourth day.
“We’ll see a bit of weakness in the market,” said Satoshi Okumoto, a general manager in Tokyo at Fukoku Mutual Life Insurance Co., which has the equivalent of $67.5 billion in assets. “The economy is improving. The government is focused more on expanding the economy than cutting the debt. They’ll need to issue more debt.”
Benchmark 10-year notes yielded 3.39 percent as of 6:40 a.m. in London, according to BGCantor Market Data. The 2.625 percent security maturing in November 2020 traded at 93 21/32.
The spread between 2- and 30-year rates was 3.98 percentage points, after expanding to a record 4.01 percentage points on Jan. 20.
Gross domestic product grew at a 3.5 percent annual pace in the last three months of 2010, up from a 2.6 percent rate in the previous quarter, according to the median estimate of economists surveyed by Bloomberg News.
Microsoft Corp., the world’s largest software maker, said yesterday second-quarter profit topped analysts’ estimates.
Fed Buying
The Federal Reserve is scheduled to buy $7 billion to $9 billion of Treasuries due from February 2018 to November 2020 today as part of its plan to keep the expansion going by pumping money into the banking system.
The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the securities, was 2.24 percentage points. The figure, which has climbed from 2010’s low of 1.47 percentage points in August, has averaged 2.09 percentage points over the past five years.
President Barack Obama has increased the U.S. publicly traded debt to a record $8.86 trillion to sustain the expansion.
“Although no rating action is contemplated at this time, the time frame for possible future actions appears to be shortening, and the probability of assigning a negative outlook in the coming two years is rising,” Moody’s said in its report yesterday. The rating is stable, the company said.
Default Swaps
Credit-default swaps on Treasuries climbed 1.5 basis points to 51.57 basis points, according to data provider CMA. That means it costs $51,570 a year to protect $10 million of debt against default for five years.
The figure compares with 59.8 basis points for debt issued by Germany, 83.1 for Japan, and 897.3 basis points for Greek bonds, the data show. The swaps make a payment to the buyer if a borrower fails to adhere to its debt agreements. Traders also use them to speculate on bonds.
Moody’s said yesterday its uncertainty over the willingness and ability of the U.S. to reduce its debt has increased due to the extension of tax cuts enacted under President George W. Bush, the chance Congress won’t reduce spending and the outcome of the November elections.
Moody’s warning came on the same day Standard & Poor’s lowered Japan to AA- from AA, indicating ratings firms are stepping up pressure on governments to curb their spending.
Peripheral Nations
The rating companies also have downgraded Europe’s so- called peripheral countries due to rising deficits and slumping economic growth.
Fitch Ratings cut Greece to BB+ on Jan. 14, following S&P and Moody’s in lowering the country to below investment grade. Moody’s began reviewing Portugal and Spain in December.
The reductions helped send an index of global bonds down for a fifth month in January, with the loss totaling 2.2 percent since the end of August, according to indexes compiled by Bank of America Merrill Lynch.
The MSCI All Country World Index of stocks returned 22 percent in the period, according to Bloomberg data. U.S. corporate bonds gained 1.2 percent, BOA indexes show.
The Obama administration and Congress are debating whether to raise the limit as the government approaches the current ceiling of $14.29 trillion, which the Treasury estimates will be reached between March 31 and May 16.
Republican lawmakers have told the president and Democratic legislators that they will insist on specific cuts as a condition of raising the debt limit.
Treasuries are poised to fall as the fight intensifies, Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., was cited by Associated Press as saying.
“The Treasury market will sell off as this get more press and with more invective,” Gross was quoted by AP as saying. “Investors like us, we sell now.”
To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.
To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.
