Bloomberg News

Treasury Yields Rise From Two-Month Low on Budget Views

November 19, 2012

Treasuries fell, pushing 10-year note yields up from a two-month low, as optimism increased that the U.S. will avoid the automatic spending cuts and tax increases scheduled to occur at year-end.

Treasuries declined as an industry report showed sales of previously owned U.S. homes unexpectedly increased last month. President Barack Obama said yesterday he was confident the U.S. will avoid the fiscal cliff. A measure of volatility in government bonds dropped to the lowest level in more than five years and trading volume dropped to below-average levels. Stocks rallied the most in two months.

“The president is optimistic and the Republicans have not given us any reason to believe he shouldn’t be,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors. “That’s pushing yields up. It’s a short week and there’s relatively thin trading, so it doesn’t take much for yields to go up or down.”

The U.S. 10-year yield climbed three basis points, or 0.03 percentage point, to 1.61 percent at 4:59 p.m. in New York, according to Bloomberg Bond Trader prices. The 1.625 percent note maturing in November 2022 fell 10/32, or $3.13 per $1,000 face amount, to 100 3/32. The yield dropped to 1.55 percent on Nov. 16, the lowest since Sept. 5.

Range Set

“We’re trading in a very narrow range,” said David Ader, head of U.S. government bond strategy at CRT Capital Group LLC in Stamford, Connecticut. “It’s Thanksgiving and people are trying to get stuff done in a very illiquid market.”

The yield will trade in a range of 1.54 percent to 1.69 percent, Ader said.

The Securities Industry and Financial Markets Association recommends a full market close Nov. 22 for the Thanksgiving Day holiday and an early close at 2 p.m. New York time on Nov. 23.

Bank of America Merrill Lynch’s MOVE index, which measures price swings for Treasuries based on options, dropped to 54.7, the lowest level since June 2007.

Treasuries have returned 0.9 percent in the month ended Nov. 16, according to Bank of America Merrill Lynch indexes. The MSCI All-Country World Index (MXWD) of stocks handed investors a 5.2 percent loss, according to data compiled by Bloomberg.

The 10-year term premium, a model created by Federal Reserve economists that includes expectations for interest rates, growth and inflation rose to negative 0.92 percent today. It reached minus 0.95 percent on Nov. 16, the lowest since Oct. 3. A negative reading indicates investors are willing to accept yields below what’s considered fair value.

Trading Pace

Treasury trading volume dropped to $174 billion, compared with the 2012 daily average of $241.9 billion, according to ICAP Plc, the largest inter-dealer broker of U.S. government debt.

Treasuries completed a four-week gain on Nov. 16, driven by demand for the relative safety of U.S. securities on speculation the fiscal cliff will choke of economic growth. A Bloomberg survey of banks and securities companies with the most recent projections given the heaviest weightings projects the 10-year note yield will be at 1.71 percent as of Dec. 31.

“I am confident we can get our fiscal situation dealt with,” Obama said yesterday at a news conference in Bangkok, where he started a three-nation Asian trip.

Before he departed the U.S., the President began on a round of deficit-reduction talks with top Republicans and Democrats to avoid the combination of $607 billion in automatic tax increases and spending cuts that threatens to cause a recession.

Political Peace

“There’s a perception that politicians are playing nice and will reach some type of agreement to avert the fiscal cliff,” said Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc., one of 21 primary dealers that trade directly with the Fed.

Purchases of existing houses, tabulated when a contract closes, increased 2.1 percent last month to a 4.79 million annual rate, exceeding the median forecast of economists surveyed by Bloomberg, figures from the National Association of Realtors showed today in Washington. The median price rose from a year ago as inventories dropped to the lowest level in almost a decade.

Housing starts slowed in October to an 840,000 pace from a four-year high of 872,000 units in September, another survey showed before tomorrow’s Commerce-Department figures.

The Standard & Poor’s 500 Index advanced 1.6 percent.

TIPS Sale

The U.S. will sell $13 billion in 10-year inflation-indexed notes on Nov. 21. Treasury Inflation Protected Securities, or TIPS, have returned 7.8 percent this year.

The Fed is swapping short-term Treasuries in its holdings with those due in six to 30 years to spur the economy by putting downward pressure on borrowing costs. The central bank sold $7.22 billion of securities due from July 2015 to November 2015 today, according to the Fed Bank of New York’s website.

Investors outside the U.S. are scooping up Treasuries.

Brazil, Belgium, Luxembourg, Russia, Switzerland, Taiwan and Hong Kong boosted their holdings of U.S. government securities by a collective $264.8 billion since the last debt- ceiling debate ended in August 2011, Treasury data released Nov. 16 show. The purchases more than made up for the $123 billion decline in U.S. government debt owned by China, America’s biggest overseas creditor, to $1.156 trillion.

Treasury yields also rose as European finance officials met in Paris today to forge a common position on Greece’s next aid payment.

Finance officials from France, Germany, Italy and Spain convened a day before a meeting of the 17 euro nations in Brussels, according to a European Union aide. EU Economic and Monetary Affairs Commissioner Olli Rehn also attended. Lengthening maturities on Greek debt and lowering rates on the country’s bailout loans are the main options being discussed to plug a funding gap, said the official, who declined to be named because the talks aren’t public.

To contact the reporters 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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