Treasuries Rise on Europe Crisis

January 02, 2012, 2:12 AM EST By Daniel Kruger

Dec. 30 (Bloomberg) -- Treasuries advanced for a fourth day, capping their biggest annual return since 2008, as investors sought the refuge of U.S. government securities on concern Europe’s sovereign-debt crisis will worsen.

Bonds extended gains as Spain’s new government moved to increase taxes and reduce spending to tackle a larger-than- forecast budget deficit that’s twice the fiscal shortfall in Italy. Treasuries are set to beat stocks, commodities and the dollar for the year, even as reports signal the U.S. economy is recovering.

“On its own, rates would be significantly higher in the U.S., but we are not an island unto ourselves,” said Larry Milstein, managing director in New York of government and agency debt trading at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors. “The exogenous impact from Europe is clearly keeping our rates much lower than they would be otherwise.”

The 10-year note yield fell two basis points, or 0.02 percentage point, to 1.88 percent as of 2:43 p.m. New York time, according to Bloomberg Bond Trader prices. It declined 15 basis points this week and lost 19 basis points in December. The 2 percent securities due in November 2021 rose 6/32 today, or $1.88 per $1,000 face amount, to 101 3/32. Their last four-day winning streak ended Nov. 17.

Thirty-year bond yields decreased one basis point to 2.89 percent today, and five-year note yields dropped five basis points to 0.83 percent.

Lower Volumes

Treasury market volumes have slid amid the Christmas and New Year’s holiday season. About $103 billion of Treasuries changed hands today as of 2:01 p.m. through ICAP Plc, the world’s largest interdealer broker. About $109 billion changed hands yesterday. The 2011 daily average is $285 billion.

The Securities Industry and Financial Markets Association recommended that trading in Treasuries close at 2 p.m. in New York and remain shut on Jan. 2 in observance of New Year’s Eve and New Year’s Day.

The Federal Reserve said today it will purchase about $45 billion of Treasuries in January and sell about $44 billion in its program to lower borrowing costs by replacing $400 billion of shorter-term assets in its holdings with longer-term debt.

U.S. government debt returned 9.6 percent in 2011, according to Bank of America Merrill Lynch data, even after Standard & Poor’s cut the nation’s AAA rating on Aug. 5. German bunds also gained 9.6 percent, while Japanese bonds advanced 2.1 percent and U.S. corporate debt rallied 7.3 percent.

Record Low

Benchmark 10-year yields dropped to a record 1.67 percent on Sept. 23 amid the European debt turmoil. Two years of summits have failed to contain a crisis that has led to bailouts of Greece, Ireland and Portugal and now threatens Spain and Italy.

Luxembourg’s Jean-Claude Juncker, who leads the group of euro-area finance ministers, said economic growth in the 17- nation region “isn’t good.” He spoke on RTL Luxembourg radio.

Spain’s deficit this year will reach 8 percent of gross domestic product, requiring tax boosts of 6 billion euros and spending cuts of 8.9 billion euros, spokeswoman Soraya Saenz de Santamaria said at a press conference in Madrid.

“A year ago there was probably a greater expectation that rates would start to creep higher,” said Adam Brown, director of Treasury trading at Barclays Plc in New York, one of 21 primary dealers that trade with the Fed. “The economy, although it seems better and we’ve had some decent growth, is not growing strong enough that there’s no fear that it dips back down, especially with something like the European issue affecting it.”

A four-week bill sale on Dec. 20 drew bids for a record 9.07 times the amount offered even though rates on the securities were below zero in New York trading.

Foreign Central Banks

U.S. government securities rose in December even as Treasuries held in custody at the Fed for foreign central banks and other official investors fell by $68.9 billion, the biggest four-week drop on record, according to Fed data. The reduction came as the dollar strengthened, with the Dollar Index increasing 2.3 percent in December.

“It’s not unlikely they are repatriating assets to shore up their own economies,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut.

S&P Downgrade

S&P downgraded the U.S. rating this year for the first time, criticizing lawmakers for failing to cut spending enough to reduce budget deficits that exceed $1 trillion a year.

Treasuries still were some of the best assets to own in 2011. U.S. 30-year bonds returned 35 percent, the most since 2008, and Treasury Inflation Protected Securities gained 14 percent, the most since 2002, the Bank of America indexes show.

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, was 1.95 percentage points today. The average over the past decade is 2.13 percentage points.

Stocks have lost 6.8 percent this year after accounting for reinvested dividends, based on the MSCI All Country World Index. The Dollar Index tracking the U.S. currency against six major counterparts rose 1.5 percent in 2011. The Standard & Poor’s GSCI Total Return Index of commodities slipped 1 percent.

Growth in the world’s biggest economy will quicken to 2.1 percent in 2012 from 1.8 percent in 2011, a Bloomberg survey of banks and securities companies shows. U.S. jobless-benefit applications over the past month fell to a three-year low, data showed yesterday. The Institute for Supply Management-Chicago Inc. said its business barometer was at 62.5 this month, compared with a Bloomberg poll forecast of 61. Readings above 50 signal growth.

U.S. payrolls added 150,000 workers in December, after gaining 120,000 in November, according to another Bloomberg survey before the government reports the data on Jan. 6.

Treasury 10-year yields will advance to 2.66 percent by the end of 2012, according to a Bloomberg survey with the most recent forecasts given the heaviest weightings.

--With assistance from Anchalee Worrachate in London. Editors: Greg Storey, Paul Cox

To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net

To contact the editor responsible for this story: Robert Burgess at bburgess@bloomberg.net

View the original article here

Banks Have Record $1.45 Trillion to Buy Treasuries on Savings

June 19, 2011, 12:05 PM EDT By Masaki Kondo, Yoshiaki Nohara and Saburo Funabiki

June 20 (Bloomberg) -- Japan’s biggest bond investors see increasing parallels between the nation’s government debt market and Treasuries, indicating that historically low yields in the U.S. have room to fall.

Just as in Japan, deposits at U.S. banks exceed loans, reaching a record $1.45 trillion last month, Federal Reserve data show. As recently as 2008, there were more loans than deposits. The gap is also at an all-time high in Japan, where banks use the money to buy bonds, helping keep yields the lowest in the world even though the country has more debt outstanding than America and a lower credit rating.

While none of the more than 40 economists surveyed by Bloomberg expect the U.S. will see two decades of stagnation like Japan, they are paring growth estimates as unemployment remains above 9 percent and the housing market struggles to recover. The International Monetary Fund cut its forecast for U.S. growth in 2011 for the second time in two months on June 17, bolstering the appeal of fixed-income assets.

“I’ve seen what happened in Japan, so when looking at the U.S. now, I think, ‘Ah, the same thing is going on,’” said Akira Takei, the Tokyo-based general manager of the international fixed-income investment department at Mizuho Asset Management Co., which oversees about $41 billion.

Savings Increase

In the decade before credit markets seized up in 2008, U.S. deposits exceeded loans by an average of about $100 billion, Fed data show. The worst recession since the 1930s led consumers to trim household debt to $13.3 trillion from the peak of $13.9 trillion in 2008, and increase savings to 4.9 percent of incomes from 1.7 percent in 2007, Fed and government data show.

Banks pared lending amid more than $2 trillion in losses and writedowns, according to data compiled by Bloomberg. Instead of making loans, financial institutions have put more cash into Treasuries and government-related debt, boosting holdings to $1.68 trillion from $1.08 trillion in early 2008, Fed data show.

Yields on 10-year Treasuries -- the benchmark for everything from corporate bonds to mortgage rates -- have fallen to less than 3 percent from the average of 6.79 percent over the past 30 years even though the amount of marketable U.S. government debt outstanding has risen to $9.26 trillion from $4.34 trillion in 2007, Treasury Department data show.

Ten-year yields fell 2.5 basis points, or 0.025 percentage point, last week to 2.94 percent in New York, the fifth straight weekly decline, according to Bloomberg Bond Trader prices. The price of the 3.125 percent security due in May 2021 rose 7/32, or $2.19 per $1,000 face amount, to 101 17/32.

Lending Drop

Loans dropped and savings rose in Japan, too. Lending has declined 27 percent from the peak in March 1996, while bank holdings of government debt surged more than fivefold to a record 158.8 trillion yen ($1.98 trillion) in April, according to the Bank of Japan. The difference in deposits and loans, known domestically as the yotai gap, is 165 trillion yen, or more than Spain’s annual economic output.

Yields on Japanese bonds due in 10 years dropped to 1.115 percent last week from 3.46 percent in 1996 and have remained at about 2 percent or lower since 2000.

The U.S. and Japan are “beginning to look similar because of the fact that we’ve had very low interest rates for a very long time now” Charles Comiskey, the head of Treasury trading at Bank of Nova Scotia in New York, said in an interview. “This is going to be 10 years of pain to de-lever ourselves from the mess of a debt-ridden society that we’ve become.”

Rates Outlook

Futures traded on the Chicago Board of Exchange indicated in January that the Fed would raise its target rate for overnight loans between banks from a record low of zero to 0.25 percent in 2011. After reports this month showed that the jobless rate rose back above 9 percent, consumer confidence fell, the housing market weakened and manufacturing slowed, traders now see no increase until late 2012 at the earliest.

The IMF said the U.S. economy will grow 2.5 percent this year and 2.7 percent in 2012, down from the 2.8 percent and 2.9 percent projected in April.

Further declines in Treasury yields may be limited because the inflation rate is higher than in Japan, where consumer price changes have been mostly negative since 2000.

U.S. prices rose 3.6 percent in May from a year earlier, according to the Labor Department. That means 10-year Treasuries yield 62 basis points less than the inflation rate. So-called real yields in Japan, where consumer prices rose 0.3 percent in April, are a positive 82 basis points.

Pimco Avoids

“Treasury bonds at the current valuation would likely disappoint long-term investors with low or even negative real returns,” Tomoya Masanao, the head of portfolio management for Japan at Pacific Investment Management Co., wrote in an e-mail to Bloomberg News. “The global economy seems more tilted to inflation than deflation over the next three to five years.”

Pimco, based in Newport Beach, California, had $1.28 trillion under management as of March 31, including the world’s biggest bond fund, the Total Return Fund. Bill Gross, the firm’s co-chief investment officer, has said mortgages, corporate bonds and sovereign debt of nations such as Canada are more attractive.

The median estimate of more than 50 economists and strategists surveyed by Bloomberg is for 10-year Treasury yields to rise to 4 percent over the next 12 months.

Those forecasts fail to take into account the weak U.S. housing market, which makes up the bulk of Americans’ net worth, according to Akio Kato, the team leader for Japanese debt in Tokyo at Kokusai Asset Management Co., which runs the $31.1 billion Global Sovereign Open fund.

Housing Tumble

“U.S. home prices won’t rebound unless household debt” is reduced, Kato said. “As long as the situation remains the same, bank lending won’t grow. U.S. banks will tighten criteria for borrowers."

House prices in 20 U.S. cities are 14 percent below the average of the past decade, according to the S&P/Case-Shiller index of property values. The gauge dropped in March to the lowest level since 2003. Japan’s land prices are still at less than half the level of two decades ago.

Japan has endured two decades of economic stagnation with nominal gross domestic product about the same as it was in 1991. Government debt is projected to reach 219 percent of GDP next year, the Organization for Economic Cooperation and Development estimates. That compares with about 59 percent in the U.S., government data show.

BOJ Nullified

The economy has struggled to recover even though the BOJ buys government securities monthly to lower borrowing costs and stimulate the economy. The efforts have been nullified as banks use BOJ funds to buy bonds rather than lend.

‘‘With no prospects for Japan’s economic growth, funds from the widening loan-deposit gap flow to bonds rather than stocks,” said Katsutoshi Inadome, a strategist in Tokyo at Mitsubishi UFJ Morgan Stanley Securities Co., a unit of the nation’s largest listed-bank.

That’s similar to the U.S., where economists are cutting growth forecasts even though the Fed has pumped almost $600 billion into the financial system since November by purchasing Treasuries under a policy known as quantitative easing. The program is due to end this week.

Mizuho’s Takei said there is a “very high chance” that lenders will continue to funnel deposits to the bond market, helping to push Treasury 10-year yields toward 2.4 percent within a few months. Takei said he favors longer-maturity securities.

“Eventually, yields in Japan and the U.S. will converge,” said Mizuho’s Takei. “This is just the beginning.”

--Editors: Philip Revzin, Rocky Swift

To contact the reporters on this story: Masaki Kondo in Singapore at mkondo3@bloomberg.net; Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net; Saburo Funabiki in Tokyo at sfunabiki@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net

View the original article here

Treasuries Drop Amid Mixed Economic Data, $72 Billion Debt Sales

May 14, 2011, 12:49 AM EDT By Susanne Walker

May 14 (Bloomberg) -- Treasuries fell for the first time in five weeks as mixed economic data and a rebound in commodities cooled demand for the safety of U.S. debt.

U.S. 10-year note yields touched the lowest since December yesterday on speculation that inflation may have peaked after the Labor Department reported the consumer price index rose 0.4 percent in April, matching economists’ forecast. The U.S. sold $72 billion in notes and bonds this week and will auction $11 billion in Treasury Inflation Protected Securities next week. The Federal Reserve will release minutes of last month’s policy meeting on May 18.

“Yields being low is because the economy is not generating enough forward momentum to suggest rising commodity prices will be passed through the underlying rate of inflation,” said Steven Ricchiuto, chief economist in New York at Mizuho Securities USA Inc. “There’s a lot of mixed data and mixed signals and it’s creating a very choppy trading environment.”

Yields on 10-year notes rose two basis points to 3.17 percent in New York, according to Bloomberg Bond Trader prices, from 3.15 percent on May 6. The yield yesterday reached 3.13 percent, the least since Dec. 8. It touched a 2011 high of 3.77 percent in February.

Yield Data

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 debt known as the break- even rate, narrowed yesterday to 2.39 percentage points from 2.67 percentage points on April 11, which was the widest in three years.

“As we look back at the week and forward to the next, one begins to get the feeling that the U.S. economy is not about to run away from anyone,” Kevin Giddis, president of fixed-income capital markets at the brokerage firm Morgan Keegan Inc. in Memphis, Tennessee, wrote yesterday in a note to clients. “Some of the major issues like housing and jobs are slow to get better.”

The Standard & Poor’s GSCI Index of 24 raw materials moved up by 1.4 percent this week after dropping 11 percent last week. The Standard & Poor’s 500 Index trimmed weekly gains, dropping by 0.8 percent yesterday. The Index dropped 1.1 percent this month through May 12 as gauges of energy and raw-materials producers slumped with metal and oil prices.

Jobs Trend

A report on May 12 showed the number of Americans filing first-time claims for unemployment insurance payments fell less than forecast last week, indicating recovery in the labor market is taking time to accelerate. Applications for jobless benefits decreased 44,000 in the week ended May 7 to 434,000, Labor Department figures showed. Economists forecast 430,000 claims, according to the median estimate in a Bloomberg News survey.

A separate report on May 12 showed sales at U.S. retailers rose in April and the March gain was revised higher, sending Treasury yields higher that day.

“The consumer is still in the game,” said Charles Comiskey, head of Treasury trading at Bank of Nova Scotia in New York. “It’s not telling you the consumer is retrenching or buying everything off the shelf.”

Off the Shelf

Sales at U.S. retailers April reflected gains at service stations and grocery stores as fuel and food prices climbed.

The 0.5 percent increase was the smallest since July and followed a 0.9 percent March gain that was more than double the previous estimate, Commerce Department figures showed in Washington. The median forecast of economists surveyed by Bloomberg News called for a 0.6 percent rise. Sales excluding automobiles and gasoline increased 0.2 percent.

The consumer price index increased 0.4 percent, matching the median forecast of economists surveyed by Bloomberg News and following a 0.5 percent advance in March, figures from the Labor Department showed in Washington. Excluding volatile food and energy, the core gauge rose 0.2 percent, also as projected.

“The inflation data was not great, but not too bad,” said Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc., one of 20 primary dealers that trade directly with the Fed. “Most people think the economy is showing signs of life, but it’s also showing signs of troubles. It’s very mixed.”

The Fed has held its target rate for overnight lending between banks at zero to 0.25 percent since December 2008. Policy makers affirmed at their April 27 meeting the plan to buy Treasuries through June in an effort to foster faster economic growth and jobs expansion.

The U.S. sold $32 billion in three-year notes, $24 billion in 10-year debt and $16 billion in 30-year bonds this week.

--Editors: Paul Cox, Greg Storey

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net;

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

View the original article here