Bloomberg News

Treasuries Gain After Italy Cut; Two-Year Yield Drops

September 20, 2011

(Corrects second-to-last paragraph to show returns are for 2011 in article published Sept. 20.)

Sept. 20 (Bloomberg) -- Treasuries rose, pushing two-year yields to a record low, as Italy’s credit-rating cut boosted demand for the relative safety of U.S. government debt.

Traders trimmed inflation bets on speculation growth will slow in the U.S. and Europe. The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of expectations for consumer prices, narrowed to 1.83 percentage points, the least in 11 months. Ten-year rates were six basis points away from a record low as economists said the Federal Reserve will announce plans to buy long-term debt after a meeting today and tomorrow.

“Treasuries are expensive, but everybody has to find a place to put their money,” said Masazumi Fukuoka, chief dealer at the Singapore branch of Mitsubishi UFJ Trust & Banking Corp., a unit of Japan’s largest publicly traded lender. “As a safe haven, they’re going to get more expensive.” Fukuoka said he has been adding to his Treasury holdings, buying as recently as last week.

The benchmark 10-year yield fell two basis points to 1.94 percent at 7:54 a.m. in London, according to Bloomberg Bond Trader prices. The 2.125 percent note maturing in August 2021 rose 5/32, or $1.56 per $1,000 face amount, to 101 22/32.

Ten-year rates dropped to a record low 1.877 percent on Sept. 12. Two-year yields slid as much as one basis point today to a record low of 0.1431 percent.

The MSCI Asia Pacific Index of shares fell 1.1 percent, dropping for a second day and helping fuel demand for debt.

Italian Rating

Italy’s rating was lowered to A from A+, with a negative outlook, on concern weakening economic growth and a “fragile” government mean the nation won’t be able to reduce its debt burden, Standard & Poor’s said in a statement.

The decision sent the euro down for a third day against the dollar. Greece’s government plans a second call with its main creditors today as it seeks to stave off a default.

“Yields can push down further,” said Hiroki Shimazu, an economist in Tokyo at SMBC Nikko Securities Inc., part of Japan’s third-largest publicly traded bank by assets. “European officials are failing to resolve the crisis. That will damage the world economy.”

U.S. builders probably started work on fewer homes in August, highlighting an industry that’s languishing more than two years into the economic recovery, economists said before a report today.

Fed Meeting

The Federal Open Market Committee will decide to replace short-maturity Treasuries in its portfolio with longer-term bonds, according to 71 percent of 42 economists surveyed by Bloomberg. The move is known as Operation Twist for its goal to change the yields on certain Treasury maturities.

Minutes of the Fed’s Aug. 9 meeting released Aug. 30 showed that some central bankers said selling debt with shorter maturities and purchasing longer-term debt had the potential to push borrowing costs lower.

The Fed holds $1.66 trillion of Treasuries, including $520 billion of debt due in 2014 and earlier that could be sold and reinvested in securities maturing from 2018 to 2039, according to CRT Capital Group LLC strategists David Ader and Ian Lyngen. That may push 10-year yields down to 1.60 percent, they said.

A smaller program of $200 billion to $300 billion in short- term sales to be reinvested further out the maturity spectrum will widen the difference between 10- and 30-year yields by about 10 basis points, Ajay Rajadhyaksha and Dean Maki, New York-based analysts at Barclays Capital Inc., wrote in a note today. The company is one of the 20 primary dealers authorized to trade directly with the central bank.

TED Spread

Demand for Treasuries increased the so-called TED spread in September as the difference between what lenders and the U.S. government pay to borrow for three months rose. The gap expanded for an 11th day yesterday to 35.2 basis points. The last time it rose for such a long stretch was in August and September of 2006. It narrowed to 34.7 basis points today.

Treasuries have returned 8.6 percent in 2011, heading for their best year since 2008 when the U.S. economy was in a recession, Bank of America Merrill Lynch data show. Government bond markets returned 8.1 percent in Germany and 1.7 percent in Japan, the figures show.

The MSCI All Country World Index of stocks handed investors a 9.1 percent loss in the period, after accounting for reinvested dividends, according to data compiled by Bloomberg.

--Editors: Garfield Reynolds, Nicholas Reynolds

To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net

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


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