Bloomberg News

Treasuries Hold Losses as Stock Gains Reduce Demand for Safety

September 01, 2011

Sept. 1 (Bloomberg) -- Treasuries held yesterday’s losses as Asian stocks extended a rally in stocks around the world, curtailing demand for the relative safety of government debt.

U.S. government returned 2.8 percent in August, the biggest monthly gain since December 2008, Bank of America Merrill Lynch data show, while the MSCI World Index of stocks lost 7 percent. The current rate of inflation, 3.6 percent as measured by the consumer price index, means 10-year notes yield negative 1.38 percent after accounting for costs in the economy.

“Investors will shift money from bonds into stocks given stocks are cheap and Treasuries are expensive,” said Hiroki Shimazu, an economist in Tokyo at SMBC Nikko Securities Inc., a unit of Japan’s third-largest publicly traded bank by assets. “Yields may gradually rise toward 2.7 percent by year-end.”

Benchmark 10-year yields were little changed at 2.22 percent as of 8:09 a.m. in London, according to Bloomberg Bond Trader prices. The 2.125 percent note due in August 2021 traded at 99 1/8. Yields fell 57 basis points last month, the most since a 71 basis-point slide in December 2008. They dropped to a record 1.97 percent on Aug. 18.

Ten-year rates will increase to 2.69 percent by year-end, according to a Bloomberg News survey of economists and analysts with the most recent forecasts given the heaviest weighting.

The MSCI Asia Pacific Index of shares rose for a sixth day, gaining 0.7 percent, after MSCI’s World Index climbed 1.4 percent yesterday.

Inflation Expectations

The rally in Treasuries in August, the biggest advance since the depths of the financial crisis, came as bond investors lowered expectations for inflation.

The so-called break-even rate, the difference in yield between 10-year Treasuries and similar-maturity inflation- indexed U.S. government bonds was 2.02 percent today, after narrowing to 1.96 percent on Aug. 18, the lowest since October. It has averaged 2.06 percentage points over the past five years.

“Almost everyone is unhappy with the current yield level,” said Sungjin Park, who heads the $58.1 billion debt division in Seoul at Samsung Asset Management Co., South Korea’s largest private bond investor. “Treasuries are expensive.”

Demand for Treasuries was supported before reports this week forecast to show U.S. manufacturing contracted for the first time in two years and job growth slowed in August.

The Institute for Supply Management will say today its factory index fell to 48.5 in August from 50.9 the previous month, according to a Bloomberg survey of economists. A reading below 50 signals contraction. U.S. employers added 70,000 workers last month, after hiring 117,000 in July, a separate survey showed before tomorrow’s Labor Department report.

‘Below Expectations’

“There is room for Treasury yields to decrease,” said Takuya Yamamoto, who helps oversee the equivalent of $129.3 billion as a portfolio manager in Tokyo at Diam Co., a unit of Dai-Ichi Life Insurance Co., Japan’s second-biggest life insurer. “Some of the economic figures have been below expectations.”

Yamamoto said he bought Treasuries last week, favoring 10- and 30-year securities.

The Fed should be ready to consider more monetary easing even while it can’t be expected to eliminate some of the forces impeding economic growth, Fed Bank of Atlanta President Dennis Lockhart said yesterday.

“Given the weak data we’ve seen recently and considering the rising concern about chronic slow growth or worse, I don’t think any policy option can be ruled out at the moment,” he said in a speech in Lafayette, Louisiana.

Instead of conducting another large-scale round of quantitative easing, the Fed may sell shorter-term securities held in its portfolio and buy longer-dated bonds, SMBC Nikko’s Shimazu said.

“That may push down yields of long-term bonds and flatten the yield curve for a short period,” Shimazu said.

--With assistance from Wes Goodman in Singapore. Editors: Naoto Hosoda, Nicholas Reynolds

To contact the reporters on this story: Lucy Meakin in London at lmeakin1@bloomberg.net; Monami Yui in Tokyo at myui1@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net


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