Bloomberg News

Treasuries Hold Gains on After U.S. Factory Orders Rose

April 03, 2012

Treasuries rose amid concern the European sovereign-debt crisis may spread and as traders bet the minutes from the Federal Reserve’s March meeting may show discussions that support additional asset purchases.

Treasuries remained higher after a government report showed U.S. factory orders increased in February less than forecast. Bill Gross, who runs the world’s biggest bond fund, said Portugal was headed for a debt “haircut” after yields on the nation’s 10-year note today touched the highest level in a week. The Federal Open Market Committee will release minutes of its March 13 meeting at 2 p.m.

“The weakness in euro land is one of the main drivers,” said Jason Rogan, director of U.S. government-bond trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “That’s led to a decent rally. Some people who would want to sell the market are on the sidelines until the Fed minutes come out. People are not wanting to fight the rally.”

The benchmark 10-year note’s yield fell two basis points, or 0.2 percentage point, to 2.16 percent at 1:35 p.m. New York time, according to Bloomberg Bond Trader prices. The 2 percent note due in February 2022 rose 5/32, or $1.56 per $1,000 face value, to 98 18/32. The yield slid three basis points yesterday. It touched a record low 1.67 percent on Sept. 23.

The yield on Spain’s 10-year bonds rose 10 basis points to 5.45 percent today and has gained more than 50 basis points since March 2. Spain’s public debt will rise to a record this year as it sells almost 37 billion euros ($49 billion) of bonds to finance a budget deficit that was more than twice the euro- region limit last year.

Lockhart’s View

Treasury yields have remained close to historic lows on a flight to quality from Europe and as the U.S. central bank has become the largest purchaser of the securities. Primary dealers say the Fed will continue to buy. Last week, 15 of 21 primary dealers surveyed said the odds are that the Fed will need a third round of bond purchases, or quantitative easing, to bolster the economy.

Fed Bank of Atlanta President Dennis Lockhart said with the positive outlook for the U.S. economy, he sees no need for quantitative easing at this time. Lockhart spoke in an interview on Bloomberg Radio’s “Hays Advantage” with Kathleen Hays.

“The economy is in a situation where it can be interpreted as half full or half empty,” he said. “I’m not concerned about a double-dip reaction. We have an economy that’s growing at a moderate pace and is getting more traction.”

‘Exceptionally Low’

Fed Chairman Ben S. Bernanke said last week the central bank will consider further stimulus. The bank on March 13 left unchanged its statement that economic conditions would probably warrant “exceptionally low” interest rates at least through late 2014. It has held its target rate to a range of zero to 0.25 percent since December 2008. The yield on the 10-year Treasury note touched a 2012 high of 2.4 percent on March 20.

U.S. factory orders rose 1.3 percent in February, after a revised 1.1 percent decline in January, compared to median estimate of a 1.5 percent increase by economists in a Bloomberg News survey before the report today.

A report April 6 is forecast to show the U.S. added 201,000 jobs in March.

“People were getting negative on the Fed,” said David Ader, head of U.S. government-bond strategy at CRT Capital Group LLC in Stamford Connecticut. “People were saying the Fed’s going to back away and pull up the 2014 time frame. Now they are rethinking and saying it’s too early to do the Fed-off trade.”

First-Quarter Loss

Treasuries fell 1.3 percent in the first quarter, the biggest decline since the last three months of 2010, according to Bank of America Merrill Lynch indexes.

The MSCI All-Country World Index (MXWD) of stocks returned 12 percent in the period including reinvested dividends, data compiled by Bloomberg show.

The central bank bought $2.3 trillion of securities in two rounds of quantitative easing from December 2008 to June 2011 to spur the economy. The Fed today purchased $1.347 billion in inflation-indexed securities as part of a program ending in June that replaces $400 billion of shorter-term debt with longer maturities to hold down borrowing costs.

China’s central bank Governor Zhou Xiaochuan said the U.S. Fed has a responsibility to consider the global effects of its actions after emerging-market economies suffered from capital inflows.

Valuation Measures

Zhou’s comments reprise criticism of the U.S. from emerging nations who complained that so-called quantitative easing was sending unwanted cash into their economies, adding to inflation risks.

Valuation measures show government debt is near the most expensive level in almost three weeks. The term premium, a model created by economists at the Fed, dropped to negative 0.48 percent today after reaching negative 0.26 percent on March 19, the least expensive since October. A negative reading indicates investors are willing to accept yields below what’s considered fair value.

Gross, co-chief investment officer and founder of Newport Beach, California-based Pacific Investment Management Co., said in a Twitter post about Portugal that “a ‘voluntary exchange’ by private market seems inevitable.” Portugal’s 10-year yield touched 12.2 percent, the highest level since March 26.

“There are concerns about Portugal,” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities Inc. in New York. “It looks like people are hedging bets out of Europe.”

To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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