Bloomberg News

Treasuries Snap Rally Before TIPS Auction, New Home Sales

August 23, 2012

Treasury 10-year yields dropped to the lowest level in a week after an industry report showed China’s manufacturing may shrink at a faster pace this month, adding to signs global growth is slowing.

U.S. government securities were also supported after an index of services and manufacturing in the euro-area contracted for a seventh month, underpinning demand for the safest assets. Federal Reserve policy makers signaled their readiness to boost record stimulus unless they are convinced the economy is poised to rebound, according to minutes of their most recent meeting released yesterday.

“There seem to be increased signs of a slowdown, particularly in China and Europe, while the U.S. economy is facing fiscal challenges in the next few months,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh. “This kind of economic backdrop will continue to support demand for government bonds.”

The benchmark 10-year Treasury yield was little changed at 1.70 percent at 7:09 a.m. in New York, according to Bloomberg Bond Trader prices. It earlier declined to 1.67 percent, the lowest level since Aug. 14. The 1.625 percent note maturing in August 2022 traded at 99 11/32.

China’s purchasing managers’ index fell to 47.8 in August from a final reading of 49.3 for July, HSBC Holdings Plc (HSBA) and Markit Economics said today. A euro-area composite index based on a survey of purchasing managers in services and manufacturing was little changed at 46.6 this month from 46.5 in July, Markit Economics said in London. Figures below 50 show contraction.

Additional Stimulus

Fed policy makers said further stimulus will probably be needed unless the economy shows signs of a durable pickup, according to the minutes of their July 31-Aug. 1 gathering.

“Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery,” the minutes showed.

The U.S. central bank is scheduled to buy as much as $2 billion of Treasuries maturing from November 2022 to February 2031 today, according to the website of its New York branch. The purchases are part of the Fed’s efforts to exchange shorter-term Treasuries in its holdings for those due in six to 30 years to support the economy by putting downward pressure on long-term borrowing costs.

TIPS Auction

The U.S. government will sell $14 billion of inflation- protected securities today. Five-year TIPS yielded negative 1.23 percent, compared with minus 1.08 percent at the previous auction on April 19, which was an all-time low.

Investors bid for 2.58 times the amount of debt offered in April, versus 3 times in December. Indirect bidders, the investor class that includes foreign central banks, bought 36 percent, the least in two years.

The U.S. will sell $35 billion of two-year debt on Aug. 28, the same amount of five-year notes the following day and $29 billion of seven-year securities on Aug. 30, according to Wrightson ICAP LLC, an economic advisory company based in Jersey City, New Jersey.

The government issues a combination of two-, five- and seven-year notes every month.

TIPS handed investors a 4.7 percent gain this year compared with a 3.5 percent return from German index-linked bonds and a loss of 2.3 percent from U.K. inflation-protected gilts, according to Bank of America Merrill Lynch indexes.

To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net


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