Bloomberg News

Treasuries Fail to Recoup Losses as Bernanke Is Ready to Act

October 05, 2011

Oct. 5 (Bloomberg) -- Treasuries failed to recoup yesterday’s steepest loss in a week after Federal Reserve Chairman Ben S. Bernanke said he’s ready to do more to sustain U.S. economic growth.

Investors should sell 10-year notes because European efforts to recapitalize the region’s banks may boost stocks and hurt bonds, JPMorgan Chase & Co. said. Efforts to improve the American and European economies are unwinding bond gains made last month when investors seeking a haven sent yields on U.S. and German debt to record lows while stocks plunged.

“Anything positive from officials gives investors some relief,” said Chungkeun Oh, a fixed-income trader in Seoul at Industrial Bank of Korea, South Korea’s largest lender to small and medium-sized companies. Bernanke’s remarks “gave investors a small amount of confidence and led yields to bounce.”

Ten-year yields were little changed today at 1.83 percent as of 7:01 a.m. in London, according to Bloomberg Bond Trader prices. The 2.125 percent security due in August 2021 changed hands at 102 21/32. The rate increased seven basis points yesterday, the most since Sept. 27.

Benchmark 10-year rates fell to 1.6714 percent in the U.S. and to 1.636 percent in Germany on Sept. 23, both record lows. The MSCI All Country World Index of stocks has lost 7.8 percent in the past month after accounting for reinvested dividends, according to data compiled by Bloomberg.

Japan’s 10-year note yielded 0.975 percent, compared with this year’s low of 0.965 percent set Sept. 22.

Fed Pledge

The Fed can give more information about its pledge to keep interest rates low at least through mid-2013, reduce the rate paid on banks’ reserve deposits or purchase more securities, Bernanke told U.S. lawmakers yesterday in Washington.

The central bank plans to buy $1 billion to $1.5 billion of Treasury Inflation Protected Securities due from January 2018 to February 2041 today, according to the New York Fed’s website, as part of its effort to keep long-term borrowing costs down.

Treasuries dropped yesterday, pushing 30-year bond yields up from the lowest level in more than two years, on expectations European Union officials will coordinate the recapitalization of banks.

Olli Rehn, the European commissioner for economic affairs, said there is an “increasingly shared view” that the region needs a coordinated approach to halt the sovereign-debt crisis, according to the Financial Times.

‘Just Pausing’

“We view policy actions to recapitalize core European banks as the most likely catalyst for a short covering rally in equities and a move higher in Treasury yields,” JPMorgan’s Terry Belton and Meera Chandan wrote in an e-mailed comment yesterday. The company is one of the 20 primary dealers authorized to trade directly with the Fed.

Europe’s problems aren’t solved, and that means the Treasury rally can go further, said Takuya Yamamoto, who helps oversee the equivalent of $129.2 billion as a portfolio manager in Tokyo at Diam Co., a unit of Dai-Ichi Life Insurance Co., Japan’s second-biggest life insurer.

“It’s just pausing,” he said. “European turmoil isn’t over.”

Yamamoto said he is considering buying Treasuries if the 10-year yield rises to 2 percent.

Industrial Bank’s Oh also said yields can fall further. He bought U.S. government debt in July and August, he said.

Italy had its credit rating reduced three levels to A2 yesterday by Moody’s Investors Service. European countries with debt ratings below the top Aaa level will probably have their ratings cut, Moody’s said yesterday.

Greek Protest

Hundreds of thousands of Greeks plan to strike today to protest Prime Minister George Papandreou’s 6.6 billion euro ($8.8 billion) austerity plan, challenging a government seeking European bailout funds to stave off default.

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said he favors so-called safe sovereign debt of nations that have the ability to increase monetary stimulus as the risk of a recession rises.

Debt of the U.S., Germany, the U.K., Australia, France and Canada are attractive, Gross said yesterday in interviews with Lisa Murphy and Adam Johnson on Bloomberg Television’s “Street Smart.”

Growth in U.S. service industries probably slowed in September, showing the recovery is struggling to gain speed, economists said before the Institute for Supply Management’s non-manufacturing index today.

Investor demand for long-term debt narrowed the yield difference between two- and 30-year Treasuries to 2.45 percentage points yesterday, the least since January 2009.

Yields are poised to rise through next year, according to a Bloomberg survey of banks and securities companies. Ten-year rates will climb to 3.02 by the end of 2012, based on the responses, with the most recent forecasts given the heaviest weightings.

--With assistance from Cordell Eddings, Lisa Murphy and Adam Johnson in New York. Editors: Rocky Swift, Naoto Hosoda

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

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net NI USB NI UST NI BON NI NOB NI GBN NI ECO NI USECO NI FED NI JPB


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