U.S. Treasuries Decline as Hurricane's Shift Hits Fuel Prices
Sept. 23 (Bloomberg) -- U.S. Treasuries fell for a second day as Hurricane Rita shifted course, triggering a decline in fuel prices and damping concern the economy would be disrupted.
Rita moved away from the main U.S. refining region near Houston as it approached the Gulf Coast. Treasuries also declined after China widened its currency trading band against the euro and yen, raising the prospect of fewer Chinese purchases of U.S. government debt. The country is the second-largest foreign holder of Treasuries behind Japan.
``There was a bit of a fear of this thing having a negative economic impact through higher energy prices,'' said Sanjay Verma, head of U.S. government bond trading at Morgan Stanley in New York. The firm is one of the 22 primary U.S. government securities dealers that trade with the Federal Reserve.
The yield on the benchmark 10-year note rose 4 basis points, or 0.04 percentage point, to 4.22 percent at 11 a.m. in New York, according to bond broker Cantor Fitzgerald LP. Bond yields move inversely to prices. The increase was the most in a week.
The price of the 4 1/4 percent note due in August 2015 dropped 5/16, or $3.13 per $1,000 face amount, to 100 7/32. The note is still headed for its first weekly advance in three, with the yield down 5 basis points.
Treasuries and crude oil have moved in the same direction about two-thirds of the time since the start of August, according to Bloomberg calculations.
Rita
Rita, downgraded to a Category 4 storm from a Category 5 yesterday, is forecast to strike the Louisiana-Texas border early tomorrow. The storm threatened to disrupt refineries in the Gulf Coast region three weeks after the area was hit by Hurricane Katrina, a Category 4 storm when it made landfall.
``There still is tremendous uncertainty,'' which ``will remain the market's support for the near-term,'' said Mark Ficke, head of U.S. government bond trading at BNP Paribas Securities Corp. in New York, another primary dealer.
Crude oil and gasoline futures surged to records after Katrina struck, with oil touching $70.85 a barrel on Aug. 30 and gasoline reaching $2.92 a gallon.
Gasoline for October delivery today fell as much as 3.7 percent to $2.06 a gallon on the New York Mercantile Exchange. Crude oil for November delivery fell as much as 1.5 percent to $65.51 a barrel. On the week oil is up 4.9 percent and gasoline has risen 17 percent.
Hurricane Concern
``Rita is a major factor, as it is expected to keep the dominant negative in place: high energy prices and their impact on both consumer spending and the animal spirits of U.S. businesses,'' said Tony Crescenzi, chief bond market strategist at Miller Tabak & Co. in New York.
A Conference Board report next week is expected to show that consumer confidence this month was the weakest since November. The index probably fell to 95 from 105.6 in August, according to the median estimate of 27 economists surveyed by Bloomberg. The report will be released Sept. 27.
The University of Michigan on Sept. 16 said its preliminary September index of consumer confidence fell to a 13-year low.
Economists surveyed by Bloomberg between Aug. 31 and Sept. 8 cut their forecasts for third-quarter growth by 0.5 percentage point and fourth-quarter expansion by 0.4 percentage point because of Katrina and surging oil prices.
Yuan
The yuan will be allowed to move as much as 3 percent higher or lower than the central bank's daily fixing rates against the euro, yen and Hong Kong dollar, compared with 1.5 percent previously, the People's Bank of China said in a statement on its Web site today. The band against the dollar, which accounts for almost all of yuan trading, was kept at 0.3 percent.
Greater flexibility in the yuan means China will be ``less present in the market buying Treasuries, and that's obviously a concern for the market,'' said Andrew Popper, who oversees $9.2 billion in assets as chief investment officer of SG Hambros Bank in London.
Treasuries on July 21 had their second-biggest decline this year when China ended the decade-old peg to the dollar, valuing the yuan against a basket of currencies within a set band of daily fluctuation. The 10-year note's yield surged 12 basis points that day.
China has become the second-biggest foreign holder of Treasuries as its central bank bought the securities to prevent its currency from appreciating above a fixed rate against the dollar. It held $242 billion of the $4.1 trillion of tradable U.S. Treasuries outstanding as of July, up from $151.6 billion at the start of 2004, a Treasury report showed on Sept. 16.
Yield Curve
The yield on two-year notes was little changed at 3.98 percent this week after the Federal Reserve raised interest rates for the 11th time since June 2004 and said more increases are likely to follow. The note's yield is more sensitive to changes in monetary policy than longer-maturity debt.
Central bank policy makers on Sept. 20 lifted their target for the overnight lending rate between banks to 3.75 percent from 3.5 percent. Fed Chairman Alan Greenspan is scheduled to speak about the economy next week at the annual meeting of the National Association of Business economists in Chicago on Sept. 27.
The difference between two- and 10-year yields narrowed to 23 basis points from 30 basis points on Sept. 16, flattening the so-called yield curve.
Some investors were more concerned about the potential for the combination of higher fuel prices and government spending on rebuilding areas hit by hurricanes to lead to faster inflation.
``There has been a flight-to-quality'' that has lifted Treasury prices, ``but we think it's been misdirected,'' said Andrew Harding, who oversees $15 billion as director of bonds at Allegiant Asset Management in Cleveland. ``Interest rates overall are going to go up.''
Funds Harding manages contain a greater percentage of cash than their benchmarks, he said.