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reasury 10-Year Notes Rise on Fed’s Plan to Buy U.S. Debt
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By Dakin Campbell and Anchalee Worrachate
March 19 (Bloomberg) -- Treasury 10-year notes rose, extending the biggest one-day gain in more than four decades, as investors raised bets the Federal Reserve’s plan to spend as much as $300 billion of government bonds will keep yields low.
Government securities around the world soared, with yields tumbling from Tokyo to Frankfurt, after Chairman Ben S. Bernanke yesterday signaled his determination to avoid a repeat of the Great Depression by pumping cash into the economy. The difference in yield between 10- and 30-year bonds widened to the most since June 2003 as the Fed said the bond purchases will concentrate on the two- and the 10-year portion of the market.
“The underlying, and most compelling, trend now is that bond yields will stay low, and not only in the U.S.,” said David Scammell, portfolio manager in London at Schroders Plc who helps oversee $158 billion in assets. “The Fed made it clear that it doesn’t want to see yields rising given the economic data looks dreadful. We like the bond market.”
The yield on the 10-year note fell two basis points to 2.52 percent by 8:45 a.m. in New York after sliding 47 basis points yesterday. The 2.75 percent security due February 2019 rose 4/32, or $1.24 per $1,000 face amount, to 101 31/32. A basis point is 0.01 percentage point.
The 30-year bond yield was little changed at 3.55 percent after yesterday tumbling 28 basis points.
Record Sales
Gains may be tempered before the government announces the amount of bonds it will sell next week. The Treasury will auction a record $41 billion of two-year notes on March 24, $34 billion of five-year debt the following day and $24 billion of seven-year issues on March 26, according to Wrightson ICAP, a research unit of the world’s largest inter-dealer broker. The sales follow $63 billion of auctions last week, including a record $34 billion of three-year notes.
“The Treasury has a significant amount of bonds to issue over the next couple of years,” said Grant Hassell, who helps manage $2.2 billion in fixed-income assets at AMP Capital Investors in Wellington, New Zealand. “People are thinking about that a lot more. The pressure short-term is for the yields to drift a little higher.”
Treasuries had declined 3.4 percent this year before yesterday’s announcement that the Fed would expand asset purchases, and were headed for their worst three-month period since the third quarter of 1980, when they fell 5.06 percent, Merrill Lynch & Co. index data show. Yesterday’s rally pared this year’s losses to 1.38 percent.
Ten-year Treasury yields still offer value and should be bought as yields fall lower, according to Goldman Sachs Group Inc. strategists led by Francesco Garzarelli. Investors should sell their positions if yields back up to 2.65 percent, according to a note to clients this morning. Goldman Sachs is one of 16 primary dealers required to bid at Treasury auctions.
“We see little reason to back away from government securities, with inflation declining and now that central banks are direct participants in the secondary market,” London-based Garzarelli wrote in a note today.
Jobless Claims
The world’s biggest economy remains under pressure. The number of people collecting U.S. jobless benefits swelled to a record 5.47 million in the week ended March 7, indicating employees, once fired, aren’t finding other work as companies cut costs. First-time claims in the week ended March 14 fell by 12,000 to 646,000, lower than the 655,000 median forecast of 39 economists surveyed by Bloomberg News.
The Conference Board’s gauge of the economy’s direction over the next three to six months dropped 0.6 percent, according to the median forecast in a Bloomberg News survey. A separate report may show manufacturing in the Philadelphia region shrank this month.
‘Capping Yields’
Stocks climbed, sending the MSCI World Index to the longest stretch of gains since 2006, as investors bet the Fed’s plan will help combat the recession. U.S. stock-index futures are higher.
“The Fed is capping Treasury yields,” said David Glocke, who manages $65 billion of Treasuries at Vanguard Group Inc. in Valley Forge, Pennsylvania. “I don’t think we will see rates drift back up above 3 percent. Everyone looks at that as being the ceiling.”
While investors had expected the central bank to step up purchases of mortgage and agency debt, companies including Goldman Sachs, Morgan Stanley and UBS AG said Bernanke would focus on expanding existing programs before buying Treasuries.
Bernanke trimmed the target rate for overnight loans between banks to a range of zero to 0.25 percent at the Dec. 16 policy meeting to help unfreeze credit markets.
Treasuries may extend gains on speculation the Fed will increase measures to keep down borrowing costs as it seeks to tackle the deepest recession since World War II.
‘Tip of Iceberg’
“In the very near term there’ll be a marginal retracement as the supply expands,” said Adam Carr, a senior economist in Sydney at ICAP Australia Ltd. “On a two-month view, I’m still quite bullish on Treasuries. It’s fair to say that they’ll expand their Treasury purchases. This is just the tip of the iceberg.”
Central bankers and the Treasury haven’t been able to meet Bernanke’s goal of reducing consumer interest rates along with the borrowing costs paid by banks. The difference between rates on 30-year fixed mortgages and 10-year Treasuries was 2.2 percentage points, Bloomberg data show. That’s up from an average of 1.75 percentage points in the decade before the subprime mortgage market collapsed.
China Holdings
Buying Treasuries may help support President Barack Obama’s pledge on March 14 that investors can have “absolute confidence” in government debt. Chinese Premier Wen Jiabao said the day before he was “worried” about holdings of Treasuries and wanted assurances that his country’s investment in the debt is safe.
China, the biggest foreign holder of U.S. debt, increased Treasury holdings by 46 percent in 2008 and now holds about $740 billion, according to Treasury Department data.
The London interbank offered rate, or Libor, that banks say they charge each other for three-month loans, was 1.23 percent yesterday, according to the British Bankers’ Association. It touched 1.33 percent last week, the highest level since Jan. 8.
The premium banks charge each other for short-term loans, the so-called Libor-OIS spread, has remained above one percentage point since Feb. 19, after falling below that threshold on Jan. 12 and staying there for almost six weeks.
javascript:togShareLinks('shr_v');
By Dakin Campbell and Anchalee Worrachate
March 19 (Bloomberg) -- Treasury 10-year notes rose, extending the biggest one-day gain in more than four decades, as investors raised bets the Federal Reserve’s plan to spend as much as $300 billion of government bonds will keep yields low.
Government securities around the world soared, with yields tumbling from Tokyo to Frankfurt, after Chairman Ben S. Bernanke yesterday signaled his determination to avoid a repeat of the Great Depression by pumping cash into the economy. The difference in yield between 10- and 30-year bonds widened to the most since June 2003 as the Fed said the bond purchases will concentrate on the two- and the 10-year portion of the market.
“The underlying, and most compelling, trend now is that bond yields will stay low, and not only in the U.S.,” said David Scammell, portfolio manager in London at Schroders Plc who helps oversee $158 billion in assets. “The Fed made it clear that it doesn’t want to see yields rising given the economic data looks dreadful. We like the bond market.”
The yield on the 10-year note fell two basis points to 2.52 percent by 8:45 a.m. in New York after sliding 47 basis points yesterday. The 2.75 percent security due February 2019 rose 4/32, or $1.24 per $1,000 face amount, to 101 31/32. A basis point is 0.01 percentage point.
The 30-year bond yield was little changed at 3.55 percent after yesterday tumbling 28 basis points.
Record Sales
Gains may be tempered before the government announces the amount of bonds it will sell next week. The Treasury will auction a record $41 billion of two-year notes on March 24, $34 billion of five-year debt the following day and $24 billion of seven-year issues on March 26, according to Wrightson ICAP, a research unit of the world’s largest inter-dealer broker. The sales follow $63 billion of auctions last week, including a record $34 billion of three-year notes.
“The Treasury has a significant amount of bonds to issue over the next couple of years,” said Grant Hassell, who helps manage $2.2 billion in fixed-income assets at AMP Capital Investors in Wellington, New Zealand. “People are thinking about that a lot more. The pressure short-term is for the yields to drift a little higher.”
Treasuries had declined 3.4 percent this year before yesterday’s announcement that the Fed would expand asset purchases, and were headed for their worst three-month period since the third quarter of 1980, when they fell 5.06 percent, Merrill Lynch & Co. index data show. Yesterday’s rally pared this year’s losses to 1.38 percent.
Ten-year Treasury yields still offer value and should be bought as yields fall lower, according to Goldman Sachs Group Inc. strategists led by Francesco Garzarelli. Investors should sell their positions if yields back up to 2.65 percent, according to a note to clients this morning. Goldman Sachs is one of 16 primary dealers required to bid at Treasury auctions.
“We see little reason to back away from government securities, with inflation declining and now that central banks are direct participants in the secondary market,” London-based Garzarelli wrote in a note today.
Jobless Claims
The world’s biggest economy remains under pressure. The number of people collecting U.S. jobless benefits swelled to a record 5.47 million in the week ended March 7, indicating employees, once fired, aren’t finding other work as companies cut costs. First-time claims in the week ended March 14 fell by 12,000 to 646,000, lower than the 655,000 median forecast of 39 economists surveyed by Bloomberg News.
The Conference Board’s gauge of the economy’s direction over the next three to six months dropped 0.6 percent, according to the median forecast in a Bloomberg News survey. A separate report may show manufacturing in the Philadelphia region shrank this month.
‘Capping Yields’
Stocks climbed, sending the MSCI World Index to the longest stretch of gains since 2006, as investors bet the Fed’s plan will help combat the recession. U.S. stock-index futures are higher.
“The Fed is capping Treasury yields,” said David Glocke, who manages $65 billion of Treasuries at Vanguard Group Inc. in Valley Forge, Pennsylvania. “I don’t think we will see rates drift back up above 3 percent. Everyone looks at that as being the ceiling.”
While investors had expected the central bank to step up purchases of mortgage and agency debt, companies including Goldman Sachs, Morgan Stanley and UBS AG said Bernanke would focus on expanding existing programs before buying Treasuries.
Bernanke trimmed the target rate for overnight loans between banks to a range of zero to 0.25 percent at the Dec. 16 policy meeting to help unfreeze credit markets.
Treasuries may extend gains on speculation the Fed will increase measures to keep down borrowing costs as it seeks to tackle the deepest recession since World War II.
‘Tip of Iceberg’
“In the very near term there’ll be a marginal retracement as the supply expands,” said Adam Carr, a senior economist in Sydney at ICAP Australia Ltd. “On a two-month view, I’m still quite bullish on Treasuries. It’s fair to say that they’ll expand their Treasury purchases. This is just the tip of the iceberg.”
Central bankers and the Treasury haven’t been able to meet Bernanke’s goal of reducing consumer interest rates along with the borrowing costs paid by banks. The difference between rates on 30-year fixed mortgages and 10-year Treasuries was 2.2 percentage points, Bloomberg data show. That’s up from an average of 1.75 percentage points in the decade before the subprime mortgage market collapsed.
China Holdings
Buying Treasuries may help support President Barack Obama’s pledge on March 14 that investors can have “absolute confidence” in government debt. Chinese Premier Wen Jiabao said the day before he was “worried” about holdings of Treasuries and wanted assurances that his country’s investment in the debt is safe.
China, the biggest foreign holder of U.S. debt, increased Treasury holdings by 46 percent in 2008 and now holds about $740 billion, according to Treasury Department data.
The London interbank offered rate, or Libor, that banks say they charge each other for three-month loans, was 1.23 percent yesterday, according to the British Bankers’ Association. It touched 1.33 percent last week, the highest level since Jan. 8.
The premium banks charge each other for short-term loans, the so-called Libor-OIS spread, has remained above one percentage point since Feb. 19, after falling below that threshold on Jan. 12 and staying there for almost six weeks.
