BS: U.S.Japanese Bonds Rise as Libyan Unrest Spurs Safety Demand
By Anchalee Worrachate and Wes Goodman
Feb. 22 (Bloomberg) -- U.S. and Japanese government bonds gained, with Treasury 10-year yields dropping to the lowest in more than two weeks, as violence in Libya bolstered demand for the relative safety of government debt.
Bonds also advanced as a rally in crude oil futures to a 28-month high boosted speculation fuel costs will curtail global economic growth. Libyan leader Muammar Qaddafi said today he hadn’t fled the country as the political crisis deepened after a crackdown on anti-government demonstrators left hundreds dead.
“Safe-haven flows are the strongest driving force in bond markets at the moment,” said Charles Diebel, head of market strategy at Lloyds Bank Corporate Markets in London. “At the same time, people are worried about the impact of rising oil prices on inflation, and that’s going to benefit longer-dated bonds. There’s a sense of increased uncertainty, and while that remains, fixed-income assets will be well-supported.”
The yield on the 10-year Treasury fell eight basis points to 3.51 percent at 11:10 a.m. in London, data compiled by Bloomberg show, and earlier reached as low as 3.49 percent. The 3.625 percent note due in February 2021 rose 22/32, or $6.87 per $1,000 face amount, to 100 31/32. The yield dropped to 3.51 percent, the lowest level since Feb. 3.
Crude oil futures contracts for April delivery on Nymex rose as high as $98.48 a barrel, the most since October 2008.
Libyan security forces attacked protesters yesterday as demonstrations spread across the Middle East and North Africa. The region produces 36 percent of the world’s oil, according to statistics compiled by BP Plc.
ECB’s Mersch
German bonds were mixed after European Central Bank council member Yves Mersch said policy makers may toughen their language on inflation next week, indicating a readiness to raise interest rates in coming months. Short-term debt tumbled after his remarks were published, while 10-year bunds pared their gains.
The yield on 10-year German bunds fell 4 basis points to 3.15 percent, while two-year note yields rose six basis points to 1.44 percent.
Investors are betting the ECB will raise its key rate to 1.25 percent in September, Eonia forward contracts show. So far, ECB President Jean-Claude Trichet has said risks to the inflation outlook are “broadly balanced,” though they “could move to the upside.”
Japanese, Australian Bonds
Japan’s 10-year yields declined three basis points to 1.28 percent, and Australia’s slid four basis points to 5.59 percent.
“We maintain our recommendation to hold 10-year government bonds,” Eiji Dohke and Maki Shimizu, Tokyo-based strategists for Japanese debt at Citigroup Inc., wrote in a report today. “Tension over the situation in the Middle East has intensified.” Citigroup is one of the 24 primary dealers that are obliged to bid at Japan’s government debt sales.
The U.S. is scheduled to sell $35 billion of two-year notes today, to be followed by auctions of five-year debt tomorrow and seven-year securities on Feb. 24.
The two-year notes yielded 0.71 percent in pre-auction trading, compared with 0.65 percent at the prior offering of the securities on Jan 25. Investors bid for 3.47 times the amount for sale last month, higher than the average of 3.40 for the past 10 auctions. Indirect bidders, the category of investors that includes foreign central banks, bought 27 percent of the notes, versus the 10-sale average of 33.8 percent.
Inflation Outlook
Interest-rate derivatives show traders anticipate economic growth that will fail to spark runaway inflation, even as global food and energy prices soar and the Federal Reserve pumps $600 billion into the financial system by buying bonds. The central bank is scheduled to purchase $6 billion to $8 billion of Treasuries due from August 2016 to February 2018 today as part of the plan.
Forward contracts on interest-rate swaps that allow investors to lock in fixed payments for 10 years a decade from now have risen to 5.30 percent, or where they were before the collapse of Lehman Brothers Holdings Inc. deepened the financial crisis in 2008. When adjusted for so-called core inflation, they’re back to 2004 levels, according to Deutsche Bank AG.
For DoubleLine Capital LP in Los Angeles, which oversees $8 billion, the worst is over for the sell-off that drove 10-year Treasury note yields as high as 3.77 percent this month from 2.33 percent in October.
‘Appropriate Level’
“Ten-year yields have gotten to an appropriate level given the pace of the economic expansion and inflation expectations,” said Gregory Whiteley, a DoubleLine manager who said he would be a buyer if yields climbed to 4 percent for the first time since April.
Fund managers became more bearish on the outlook for Treasuries through March, according to a weekly survey by Ried Thunberg ICAP Inc. Ried’s sentiment index fell to 47 for the seven days ended Feb. 18 from 49 the week before. A figure less than 50 indicates investors expect prices to decline. The fund managers surveyed turned less pessimistic when asked about the outlook for Treasuries through June 30.
Declines in stocks and an earthquake in the New Zealand city of Christchurch helped drive demand for safety. The MSCI Asia Pacific Index of shares fell 1.9 percent, the biggest drop in a month. Europe’s Stoxx 600 index slid 0.9 percent.
Libya’s credit rating was cut to BBB+ by Standard & Poor’s today. Bahrain’s sovereign credit rating was also cut yesterday as the country also struggled to contain anti-government protests.
“The U.S. economy is good, but I’m concerned about energy prices because of Libya and other Mideast countries,” said Takuya Yamamoto, who helps oversee the equivalent of $115 billion as a portfolio manager in Tokyo at Diam Co., a unit of Dai-Ichi Life Insurance Co., Japan’s second-largest life insurer. “There’s a chance yields will decrease.”
--With assistance from Masaki Kondo in Tokyo and Liz Capo McCormick in New York. Editors: Keith Campbell, Daniel Tilles.
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 dtilles@bloomberg.net.
