Treasuries Decline on Concern U.S. Will Flood Market With Debt
http://www.bloomberg.com/apps/news?pid=20602007&sid=aSkRcj1aceVY&refer=govt_bonds#
By Dakin Campbell and Lukanyo Mnyanda
Dec. 10 (Bloomberg) -- Treasuries fell, snapping a rally that pushed three-month bill rates below zero, before $44 billion in note sales amid concern the government’s need to fund the financial system’s rescue will flood the market with debt.
The declines pushed yields higher as the Treasury Department prepared to auction $28 billion of three-year notes today and $16 billion of 10-year securities tomorrow. U.S. stocks rose on speculation lawmakers will approve a $15 billion bailout to keep automakers afloat. Rates on three-month bills rose after turning negative yesterday for the first time.
“We have a lot of supply coming up,” said
Thomas Roth, head of U.S. government bond trading in New York at Dresdner Kleinwort Securities LLC, one of 17 primary dealers that trade with the Federal Reserve. “We have priced in a lot of bad news, and maybe that will all come to fruition, but maybe it won’t. The market is priced very richly.”
The yield on the benchmark
10-year note rose four basis points, or 0.04 percentage point, to 2.69 percent at 12:02 p.m. in New York, according to BGCantor Market Data. The price of the 3.75 percent security due in November 2018 fell 10/32, or $3.13 per $1,000 face amount, to 109 7/32. The yield on the two-year note increased two basis points to 0.86 percent.
Treasuries pared earlier losses as investors betting on lower yields seized an opportunity to buy government securities.
“If the market is lower, you buy it -- funding rates are zero and the Fed is easing next week,” said
Charles Comiskey, co-head of U.S. Treasury trading in New York at HSBC Securities USA Inc., another primary dealer.
Three-Month Bills
The three-month
bill rate was 0.01 percent after falling to minus 0.01 percent yesterday. The Treasury sold $27 billion of the securities on Dec. 8 at a high discount rate of 0.005 percent, the lowest since it started auctioning them in 1929.
While U.S. borrowing costs are dropping to record lows, companies such as El Paso Corp. and Cox Communications Inc. are still paying the highest relative rates ever to sell debt not backed by the U.S. government. Yields relative to benchmark rates on investment-grade corporate bonds surged to a record 6.55 percentage points yesterday, according to Merrill Lynch & Co. index data. Spreads on high-yield bonds touched 20.6 percentage points yesterday, Merrill data show.
Investors looking for alternatives are buying agency notes and about $65 billion in financial-company bonds guaranteed by the Federal Deposit Insurance Corp. On Dec. 5, the yield on two- year debt issued by the government-sponsored enterprises Fannie Mae and Freddie Mac, and the Federal Home Loan banks, fell below the three-month London interbank offered rate for the first time since Oct. 14, according to strategists at UBS Securities LLC, another primary dealer.
‘Higher-Yielding Pastures’
“The agency market has finally seen the direct benefit of crashing Treasury yields as investors seek greener and higher- yielding pastures,” UBS strategists led by
William O’Donnell wrote in a note to clients today. This “should better lubricate the transmission mechanism of GSE funding into mortgage rates -- a key goal for policy makers.”
Demand for government debt also slumped as banks showed less reluctance to lend. The difference between what banks and the Treasury pay to borrow money for three months, the so-called
TED spread, narrowed nine basis points to 209 basis points, the least in two weeks. It was as wide as 464 basis points on Oct. 10 and averaged 38 basis points in the year before the credit crunch began in August 2007.
Stock Gains
Treasuries have returned 11.9 percent in 2008, their best year since 2000, according to Merrill Lynch & Co. indexes. During that time, the three-month bill rate declined from 3.24 percent, while the yield on the benchmark 10-year note fell from 4.02 percent as the meltdown of the mortgage market pushed the U.S. into recession.
The yield on the 10-year note will rise to 3.66 percent by the end of 2009, according to 50 economists surveyed by Bloomberg. The two-year note yield will also increase, to 1.78 percent, over the same period, economists forecast.
Stocks rose on speculation lawmakers will approve a $15 billion bailout to keep automakers afloat in the government’s latest effort to boost the economy. The Standard & Poor’s 500 Index advanced 1.8 percent and the MSCI World Index of stocks gained 1.6 percent.
The U.S. may sell as much as $1.5 trillion in debt as the budget deficit approaches $1 trillion in the 2009 fiscal year, according to Bank of America Corp.
Fed Debt
“Longer term, we think everything the Federal Reserve is doing and that the government is doing ends up being very inflationary,” said
Ira Jersey, an interest-rate strategist at primary dealer Credit Suisse Group AG, in an Bloomberg Television interview. “It makes sense for the yield curve to steepen a bit and for longer-term yields to rise from these historic lows.”
The Fed explored the idea of issuing its own debt in discussions with Congress as the central bank sought ways of coping with a balance sheet that has more than doubled in the past year. The Fed began examining the issue after Treasury officials scaled back their funding assistance to it in the last two months, a person briefed by a government official said on condition of anonymity.
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