(Updates currency in third paragraph, yield in eighth.)
Oct. 17 (Bloomberg) -- International central banks are selling the most Treasuries since the credit crisis began just as institutional investors load up on U.S. government bonds.
The Federal Reserve said its holdings of U.S. government debt on behalf of central bankers and institutional investors outside America has plunged $76.5 billion in the last seven weeks, the most since August 2007. At the same time, bond mutual funds are adding Treasuries, banks have increased their holdings 45 percent in the past five years and the Fed has added $656 billion to its balance sheet this year.
Rather than a referendum on the U.S.’s $1.3 trillion budget deficit and rising debt burden, sales by foreign policy makers may have more to do with supporting their currencies after the Brazilian real weakened 11 percent and Taiwan’s dollar lost 4.4 percent against the U.S. dollar since June. With economists forecasting inflation slowing to 2.1 percent in 2012 from 3.1 percent this year and the Fed’s commitment to keeping interest rates near zero, investors say the demand that pushed government bond yields to record lows last month will be sustained.
“Demand will come from banks, insurance companies and from pension funds which are still massively underexposed to Treasuries,” Stuart Thomson, a fixed-income fund manager in Glasgow at Ignis Asset Management, which oversees 75 billion pounds ($118 billion), said in an Oct. 12 telephone interview.
Progress on a plan that may provide more funds for European bailouts while imposing writedowns on Greek bonds damped demand for the perceived safety of Treasuries for a third week in the period ended Oct. 14. Germany’s Chancellor Angela Merkel and France’s President Nicolas Sarkozy set Nov. 3 as a deadline for a plan to resolve the crisis. Slovakia, on Oct. 13, became the last of the 17 euro countries to ratify the 440-billion euro ($607.9 billion) European Financial Stability Facility.
German officials said today that European Union leaders won’t provide the complete fix to the debt crisis that policy makers are pushing for at an Oct. 23 summit. Merkel has made it clear that “dreams that are taking hold again now that with this package everything will be solved and everything will be over on Monday won’t be able to be fulfilled,” Steffen Seibert, Merkel’s chief spokesman, said at a briefing in Berlin today.
Yields on U.S. 10-year notes rose 17 basis points, or 0.17 percentage point to 2.25 percent last week, while the price of the benchmark 2.125 percent security due August 2021 fell 1 16/32, or $15 per $1,000 face amount, to 98 29/32, according to Bloomberg Bond Trader prices.
The yield was 2.18 percent at 10:53 a.m. in New York.
The latest Treasury Department data show holdings of U.S. debt by foreign investors fell in June and July by 0.7 percent to $4.48 trillion, paring the year-to-date gain to 1 percent, the smallest increase since a decline in 2006. International holdings of U.S. government debt rose 20 percent in 2009 and 2010 and have grown at a compound annual rate of 17 percent since 2001. The next report on holdings is due tomorrow.
Dollar strength in September likely led emerging-market central banks to sell Treasuries as they used foreign-exchange reserves buy their own currencies, according to Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York.
The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major trading partners, rose 6.3 percent last month, the most since October 2008, after Lehman Brothers Holdings Inc. collapsed.
Reductions in reserves often match declines in Treasury holdings. Brazil’s reserves fell 1 percent in September, the first drop since April 2009, when the country reduced its Treasury position 0.5 percent to $126 billion. Taiwan’s reserves were down 2.8 percent, the biggest drop since August 2008 when holdings of Treasuries fell 2.5 percent to $66.2 billion. Taiwan held $154.3 billion of Treasuries in July, while Brazil owned $210 billion, according to the Treasury.
“There have been multiple reports of intervention by emerging market central banks to support their own currencies against the dollar,” Priya Misra and Shyam Rajan, interest-rate strategists at Charlotte, North Carolina-based Bank of America Corp., wrote in an Oct. 14 report to clients.
Sales by central banks have little to do with the fundamentals of the world’s biggest economy and don’t take into account the Fed’s pledge to keep its target rate for overnight loans between banks near zero through 2013.
Unemployment held at 9.1 percent in September. The economy almost stalled in the first six months of 2011, growing at an annualized pace of 1.3 percent from April through June, after 0.4 percent in the first quarter, the Commerce Department said last month.
U.S. gross domestic product will expand 1.7 percent this year and 2 percent in the 2012, according to the median in Bloomberg surveys of almost 100 economists. Inflation will slow next year to 2.1 percent, from an annual average of 3.3 percent over the past 30 years, according to data compiled by Bloomberg.
Consumer prices rose 0.3 percent in September, the smallest gain in three months, according to the median forecast of economists surveyed by Bloomberg News before Labor Department data on Oct. 19.
The Senate tabled President Barack Obama’s $447 billion jobs bill last week. The legislation would have created 1.9 million jobs and supported growth in 2012, according to Mark Zandi, chief economist at Moody’s Analytics in West Chester, Pennsylvania.
Congress and Obama agreed Aug. 1 to $2.4 trillion of budget cuts during the next 10 years, though the President and House Republican leaders haven’t come closer to compromising on cutting the $1.3 trillion federal deficit.
“The economy is slowing and the federal government is going to be borrowing less,” Michael Cheah, who manages $2 billion in bonds at SunAmerica Asset Management in Jersey City, New Jersey, said in an interview last week. “Given where we are, where there is very little chance of the Fed tightening in the next two or three years, and very little chance of inflation going up, any selling will only lead to a temporary change in the price. In the bond market the fundamentals always prevail.”
Demand at government auctions helps show why yields are at about record lows. Treasury sold $13 billion of 30-year bonds Oct. 13 at an all-time low yield of 3.12 percent even as demand from the class of investors that includes foreign central banks was below the average for the prior 10 sales. The ratio of total bids to debt sold was 2.94 times, the most since March.
Investors bid $2.98 for each of the $1.68 trillion of Treasury notes and bonds sold this year. That almost matches last year’s record $2.99 in bids when the Treasury sold $2.2 trillion, and is up from $2.56 in 2007 when the U.S. issued $581 billion in notes and bonds, government data show.
The Fed’s purchases increased its holdings of Treasuries to $1.67 trillion. That’s 17 percent of the $9.6 trillion of outstanding public government debt, up from 11 percent at the end of 2010.
Private investors have also stepped in, including Pacific Investment Management Co.’s $242 billion Total Return Fund. Co- manager Bill Gross has moved 16 percent of its assets into U.S. government securities as of September after owning derivative bets against the debt in March.
Taxable bond mutual funds that invest primarily in U.S. debt markets held an average 12 percent of assets in Treasuries last quarter, compared with a 34 percent weighting in the Barclays Aggregate bond index against which they measure their performance, according to Chicago-based Morningstar Inc.
That gap suggests that there is more untapped demand that will come from U.S. investors, said Amitabh Arora, an interest- rate strategist in New York at Citigroup Inc., one of 22 primary dealers that trade with the Fed. “Our indicators suggest money managers are definitely underweight” U.S. government debt, Arora said in an interview.
Demand from U.S. banks has also underpinned Treasuries. Customer deposits at U.S. lenders have exceeded loans since December 2008, reaching a record $1.61 trillion in September, Fed data show. The wider gap and the deteriorating U.S. economy is prompting banks to buy Treasuries, according to Akira Takei, general manager of the international fixed-income investment department at Mizuho Asset Management Co. in Tokyo.
Banks’ holdings of Treasuries and government-related debt totaled $1.67 trillion last month, approaching the record $1.69 trillion reached in May.
“There’s potentially substantial demand for Treasuries” which will emerge over time, said Takei, whose company manages the equivalent of $43 billion. “Bank lending is clearly not rising, whereas deposits keep coming in, and most funds are parked in cash.”
--With assistance from Keith Jenkins in London, Wes Goodman and Masaki Kondo in Singapore, Ye Xie in New York and Peter Cook in Washington. Editors: Philip Revzin, Dave Liedtka
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