Bloomberg News

Treasuries Fall for Fourth Day Before Housing Starts Data

August 16, 2012

Treasuries fell for a fourth day before a report economists forecast will show new-home construction in the U.S. was close to the most since 2008.

Ten-year yields, the benchmark for home mortgages and corporate bonds, climbed to the highest level in 13 weeks. Reports on jobs, consumption and factory production this month all pointed to improvement in the U.S. economy, curbing demand for the relative safety of Treasuries as stocks gained.

“Yields will go up,” said Kei Katayama, who buys U.S. government debt in Tokyo for Daiwa SB Investments Ltd., which manages the equivalent of $62.8 billion and is a unit of Japan’s second-largest brokerage. “Housing is very strong. It’s steady but slow growth” for the economy, he said.

The 10-year rate increased four basis points, or 0.04 percentage point, to 1.85 percent as of 6:41 a.m. in London, according to Bloomberg Bond Trader data. It was as high as 1.86 percent, the most since May 11. The price of the 1.625 percent security due in August 2022 slid 11/32, or $3.44 per $1,000 face amount, to 97 29/32.

Daiwa SB prefers shorter maturities, those that will fall least if yields rise, Katayama said.

U.S. builders broke ground on homes at an annual rate of 756,000 houses in July, according to the median estimate of economists surveyed by Bloomberg News. June’s pace of 760,000 was the highest since October 2008.

Other reports today will probably show manufacturing in the Philadelphia area shrank in August and initial claims for unemployment benefits were little changed last week, according to separate surveys.

Housing Report

The U.S. added 163,000 jobs last month, a government report showed on Aug. 3, more than the 100,000 projected by analysts. Retail sales rose 0.8 percent, the biggest increase since February, Commerce Department figures showed Aug. 14. Industrial production increased 0.6 percent in July from June, the Federal Reserve reported yesterday.

Treasuries have handed investors a 1.4 percent loss this month as of yesterday, according to Bank of America Merrill Lynch data. An index of sovereign bonds around the world dropped 0.6 percent, the data show.

The MSCI All-Country World Index (MXWD) of stocks returned 2.3 percent including reinvested dividends, according to data compiled by Bloomberg.

Improvement in the economy is damping speculation the Fed will expand stimulus as soon as its Sept. 12-13 meeting.

The U.S. central bank bought $2.3 trillion of mortgage and Treasury debt from 2008 to 2011 in two rounds of so-called quantitative easing to cap borrowing costs. It’s now in the process of swapping shorter-term Treasuries in its holdings with those due in six to 30 years to put downward pressure on long- term borrowing costs.

Fed Operation

The Fed is scheduled to buy as much as $2 billion of Treasuries due from February 2036 to August 2042 today as part of the program, according to the Fed Bank of New York website.

The 10-year term premium, a model created by economists at the Fed that includes expectations for interest rates, growth and inflation, rose to minus 0.70 percent, the least negative reading since May 3.

It was as low as negative 1.02 percent on July 24, the most expensive level on record. A negative reading indicates investors are willing to accept yields below what’s considered fair value.

TIPS Auction

The U.S. is scheduled to announce today how much it plans to raise in sale of five-year Treasury Inflation Protected Securities Aug. 23.

The auction will probably be for $14 billion, according to Wrightson ICAP LLC, an economic advisory company in Jersey City, New Jersey. The last sale of the securities was for $16 billion on April 19.

An index of TIPS has declined 2.1 percent loss this month, based on the Bank of America figures. The U.S. consumer-price index rose 1.4 percent in July from the year before, the smallest increase since November 2010, the Labor Department data yesterday showed.

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, was 2.27 percentage points. The average over the past decade is 2.15 percentage points.

Investors received 1 percent of additional yield by buying 10-year notes in the U.S. instead of Japan. The difference was the most since May.

Biggest Creditor

Japan, which has purchased almost five times the amount of Treasuries as China in 2012, is on course to overtake the world’s most populous country by year-end as the largest creditor to the U.S.

Investors in Japan bought $10.4 billion of Treasuries in June, bringing purchases for 2012 to $61.3 billion and total holdings of the debt to $1.1193 trillion, Treasury data yesterday showed.

China added $300 million to its portfolio of U.S. government securities for the month, raising its purchases this year to $12.4 billion and its stake in Treasuries to $1.1643 trillion.

Should both countries continue buying at their respective paces through 2012, Japan will end the year with more Treasuries.

To contact the reporter on this story: Wes Goodman in Singapore at

To contact the editor responsible for this story: Rocky Swift at

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