Bloomberg News

Treasuries Snap Gain on Bets Fed to Refrain New Stimulus

May 02, 2012

Treasury 10-year yields, little changed today, have been less than 2 percent for a week on signs that the U.S. economy is struggling to pick up.

Investors who scooped up U.S. debt as a haven from uneven economic growth and Europe’s debt crisis drove an 8.7 percent rally over the past year as of yesterday, based on Bank of America Merrill Lynch indexes. The MSCI All-Country World Index of stocks lost 5 percent including dividends. The U.S. is scheduled to release today the sizes of three auctions set for next week, and it may announce plans to sell floating-rate debt.

“Treasuries are still a safe haven,” said Tsutomu Komiya, who helps oversee the equivalent of $111 billion as an investor in Tokyo at Daiwa Asset Management Co., a unit of Japan’s second-biggest brokerage. “I’m hopeful the U.S. economy will strengthen, but I may change my opinion.”

U.S. 10-year yields were little changed at 1.95 percent as of 1:07 p.m. in Tokyo, according to Bloomberg Bond Trader data. The 2 percent security due in February 2022 changed hands at 100 14/32. The rate slid to a record low of 1.67 percent Sept. 23. The average over the past decade is 3.83 percent.

Thirty-year yields of 3.15 percent may have trouble rising past their 200-day moving average of 3.18 percent, Komiya said. The moving average is seen as a barrier by some traders.

Japan’s 10-year rate held at 0.875 percent, matching the least since October 2010.

U.S. gross domestic product growth slowed to a 2.2 percent annual pace in the first quarter from 3 percent in the prior three months, the Commerce Department reported April 27. Standard & Poor’s cut Spain’s debt rating on April 26, increasing concern that European governments won’t be able to pay their debts.

ISM Data

U.S. payrolls rose by 161,000 in April after a 120,000 gain in March, while the jobless rate stayed at 8.2 percent, according to economist forecasts before the Labor Department report May 4.

Treasuries fell yesterday after the Institute for Supply Management’s factory index rose to 54.8 in April from 53.4 the month before.

“To argue that the bond market is suggesting optimism on the economy, with 10-year yields below 2 percent, is a little tough,” said Justin Hoogendoorn, a fixed-income strategist at Bank of Montreal (BMO) unit BMO Capital Markets in Chicago. “At the margin, there’s a little optimism.”

The government will probably sell $32 billion of 3-year notes, $24 billion of 10-year securities and $16 billion of the 30-year bonds over three days starting May 8, according to Wrightson ICAP LLC, an economic advisory company in Jersey City, New Jersey.

Floating-Rate Bonds

Maturing Treasuries available for reinvestment will total $36.7 billion, and the sales will raise $35.3 billion of new cash, according to Wrightson.

The U.S. may also announce plans to sell floating-rate securities, Mary Miller, the Treasury Department’s undersecretary for domestic finance, said Feb. 1.

The Federal Reserve plans to sell as much as $1.5 billion of Treasury Inflation Protected Securities from its holdings today. The notes will be those maturing from April 2013 to April 2015, according to the Fed Bank of New York’s website. The sales are part of the central bank’s effort to replace $400 billion of shorter-term debt in its holdings with longer maturities by the end of June to hold down borrowing costs.

Policy makers have pledged to keep the benchmark target for overnight bank lending at almost zero until at least late 2014. The central bank has also purchased $2.3 trillion of debt in two rounds of quantitative easing, or QE.

Pimco Favors

Fed efforts to support the economy will push the inflation rate higher, according to Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co.

Pimco favors debt in the five-year maturity range, as well as dividend-paying stocks that yield 3 to 4 percent, Gross said in his monthly investment outlook on the Newport Beach, California-based company’s website yesterday. Real assets and commodities should be part of an investor’s portfolio, he wrote.

“Not suddenly, but over time, gradually higher rates of inflation should be the result of QE policies and zero-bound yields that will likely continue for years to come,” Gross said in the report.

The difference between yields on 10-year notes and same- maturity TIPS, a gauge of trader expectations for consumer prices over the life of the debt, has widened to 2.29 percentage points from 1.95 percentage points at the end of 2011. The average over the past decade is 2.14 percentage points.

Three voting members of the Federal Open Market Committee said they don’t see a need to ease policy further.

Fed Bank of Richmond President Jeffrey Lacker said in Washington that more monetary stimulus risks stoking inflation while doing little to strengthen the recovery. The San Francisco Fed’s John Williams said the outlook he expects doesn’t warrant more bond buying, and Atlanta’s Dennis Lockhart repeated that he’s skeptical of the benefits of such action.

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


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