Treasuries Gain With Commodities on QE Bets as U.S. Stocks Drop
January 27, 2012, 4:02 AM ESTBy Rita Nazareth and Susanne Walker
Jan. 26 (Bloomberg) -- Treasuries and commodities rose for a second day after the Federal Reserve yesterday pledged to keep interest rates low and said it is considering more bond purchases. U.S. stocks retreated from a six-month high, while Europe’s benchmark equity index entered a bull market.
Ten-year Treasury yields slid six basis points to 1.94 percent at 4 p.m. in New York after decreasing the most in two weeks yesterday. Nickel and copper climbed at least 2.5 percent to lead gains in 19 of 24 materials in the S&P GSCI Index. The dollar weakened against 13 of 16 major peers. The Standard & Poor’s 500 Index slipped 0.6 percent to 1,318.45. The Stoxx Europe 600 Index added 1.1 percent, extending its rebound from last year’s low to 20 percent, while Italy’s 10-year yields dropped to a seven-week low.
The Fed said yesterday it plans to keep interest rates low through at least late 2014 and Chairman Ben S. Bernanke said policy makers are considering more bond purchases to boost growth. U.S. equities turned lower after new-home sales unexpectedly decreased, erasing gains triggered after earnings and orders for durable goods topped forecasts and initial jobless claims remained below 400,000.
“You’ve got the Fed saying: don’t worry about us raising rates,” Nick Sargen, chief investment officer at Fort Washington Investment Advisors in Cincinnati, which oversees $40 billion, said in a phone interview. “The risks are still out there, but the evidence doesn’t suggest that it’s bad as people thought. There’s a revaluation going on.”
Record Low
Five-year Treasury yields touched a record low of 0.75 percent. A third, fourth and fifth round of quantitative easing by the Fed “lie ahead,” Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., wrote in a Twitter post.
Treasuries also gained as a $29 billion auction of seven- year securities at a record low yield of 1.359 percent, compared with a forecast of 1.346 percent in a Bloomberg News survey of eight of the Fed’s 21 primary dealers. The previous all-time low auction yield was 1.415 percent in November. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of debt offered, was 2.73, versus an average of 2.82 for the past 10 auctions. The Fed yesterday said bond buying is “an option that’s certainly on the table.”
‘Free Pass’
“Bernanke gave people a free pass to buy the belly of the curve,” said Dan Mulholland, a Treasury trader in New York at RBC Capital Markets LLC, one of the 21 primary dealers required to bid at government debt auctions. He was referring to Treasuries maturing in the medium term. “Yesterday’s Fed announcement caught the market off guard.”
Benchmark gauges of corporate credit risk in the U.S. and Europe fell to the lowest in more than five months. The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses or to speculate on creditworthiness, dropped 0.8 basis point to a mid- price of 101.13 basis points, according to Markit Group Ltd. In London, the Markit iTraxx Europe Index fell 6.5 basis points to 143.2, the lowest since Aug. 17.
The dollar declined the most against the Brazilian real and South African rand, losing more than 0.7 percent against each. It touched the lowest level since September versus the Mexican peso. Goldman Sachs Group Inc. recommended buying the peso and the Canadian dollar versus the U.S. currency, saying the Fed’s pledge to keep rates low reaffirms a dollar “weakening trend.”
Copper increased 1.9 percent to $3.9015 a pound in New York, a four-month high, while oil added 0.3 percent to $99.70 a barrel.
Retreat From Six-Month High
The Dow Jones Industrial Average slipped 22.33 points, or 0.2 percent, to 12,734.63 after climbing above its highest closing level since May 2008 in the first hour of the session.
The S&P 500 retreated from a six-month high as banks led losses among 24 industries, falling 3.3 percent as a group, amid concern prolonged record-low interest rates will weigh on lending profits. Wells Fargo & Co. and Bank of New York Mellon Corp. paced declines with losses of more than 2 percent.
NVR Inc. and Toll Brothers Inc. helped lead declines in an S&P index of homebuilders, dropping at least 5 percent. Purchases of single-family properties decreased 2.2 percent in December from the prior month to a 307,000 annual pace, figures from the Commerce Department showed today. Builders sold 302,000 homes last year, down 6.2 percent from 2010 and marking the worst year in data going back to 1963.
Earnings Season
AT&T Inc., the largest U.S. phone company, declined 2.5 percent after predicting 2012 earnings that trailed analysts’ forecasts. SanDisk Corp. tumbled 11 percent after the world’s biggest maker of flash-memory cards gave a sales forecast that fell short of projections.
Caterpillar Inc., the largest construction and mining- equipment maker, rose 2.1 percent for the biggest gain in the Dow as earnings exceeded analysts’ estimates. Netflix Inc. surged 22 percent after earnings beat analyst estimates as the online and mail-order video-rental service signed 610,000 U.S. customers last quarter and forecast improving margins in its streaming business.
The Stoxx Europe 600 Index climbed 1.1 percent as eight shares advanced for every one that declined. Rio Tinto Group and BHP Billiton Ltd. led a rally in mining companies, advancing more than 3 percent. Logitech International SA tumbled 12 percent after the world’s biggest maker of computer mice cut full-year profit and sales forecasts.
Italy’s 10-year bond yield dropped 18 basis points to 6.05 percent as the government sold 5 billion euros of zero-coupon and inflation-linked debt maturing in 2014. The nation’s two- year yield declined 14 basis points, while the similar maturity Spanish yield slid 23 basis points.
--Editors: Michael P. Regan, Jeff Sutherland
To contact the reporters on this story: Michael P. Regan in New York at mregan12@bloomberg.net; Rita Nazareth in New York at rnazareth@bloomberg.net
To contact the editor responsible for this story: Chris Nagi at chrisnagi@bloomberg.net
