Bloomberg News

Treasuries Snap Gain on Speculation ECB to Cut Rate

July 02, 2012

Treasuries snapped a gain from yesterday on speculation the European Central Bank will cut borrowing costs this week to stimulate growth, reducing demand for the relative safety of U.S. securities.

ECB officials will lower their main interest rate by a quarter percentage point to a record 0.75 percent on July 5, a Bloomberg News survey of economists shows. European Union leaders, who announced plans last week to stem the region’s debt crisis by amending bailout rules and moving toward a banking union, are now looking to the central bank to help. Treasury yields that are about 15 basis points from the record low are poised to rise, Bank of America Merrill Lynch said in a report.

“The ECB may cut rates, and that should be helpful for the world economy,” said Kazuaki Oh’e, a debt salesman in Tokyo at CIBC World Markets Japan Inc., a unit of Canada’s fifth-largest lender. “It creates a downside risk for Treasuries. The current level for Treasuries isn’t too attractive.”

Benchmark 10-year notes yielded 1.59 percent as of 12:03 p.m. in Tokyo, according to Bloomberg Bond Trader data. The record low yield was 1.44 percent set June 1. The 1.75 percent note due in May 2022 changed hands at 101 13/32.

Japan’s 10-year rate was little changed at 0.83 percent. Investors earn an extra 76 basis points for buying 10-year notes in the U.S. instead of in Japan, versus 2.04 percentage points a year ago. A basis point is 0.01 percentage point.

Indicating Contraction

Treasuries rose yesterday after the Institute for Supply Management’s factory index slid to 49.7 for June from 53.5 in May. Figures less than 50 signal contraction.

U.S. factory orders probably advanced 0.1 percent in May after a 0.6 percent decline the month before, according to the median estimate of economists surveyed by Bloomberg News before the Commerce Department reports the figure today.

The U.S. is one of the best places to invest among advanced economies, said Mohamed El-Erian, co-chief investment officer at Pacific Investment Management Co., which runs the world’s biggest bond fund.

“Bond yields will stay” near current levels, El-Erian said yesterday on Bloomberg Television’s “In the Loop” with Betty Liu, Dominic Chu, Joshua Lipton and Alix Steel. “That speaks to high-quality companies. It speaks to the Treasury market,” said El-Erian, who is based in Newport Beach, California.

Ten-year yields will rise to 1.9 percent by year-end, according to Bank of America in a report yesterday by David Woo and John Shin in New York and Sabine Schels in London.

Loss Projected

An investor who bought today and sold at the end of 2012 would lose 1.8 percent if the forecast is correct, according to data compiled by Bloomberg.

The Federal Reserve will increase its asset purchases at its September meeting as it strives to support the U.S. economy, increasing inflation expectations and sending yields higher, according to Bank of America, one of the 21 primary dealers that trade directly with the central bank.

The difference between yields on 10-year notes and same- maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, was 2.08 percentage points. The average over the past decade is 2.15 percentage points.

The central bank on June 20 expanded so-called Operation Twist, its program to replace $400 billion of short-term Treasuries in its portfolio with longer-term debt to lengthen the average maturity of its holdings, by $267 billion and extended it until year-end.

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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