Treasuries Snap Gain on Bets Fed to Refrain New Stimulus
Treasuries snapped a gain, following the biggest monthly rally since September, on speculation reports this week will show the U.S. economy is growing enough to keep the Federal Reserve from increasing its debt purchases.
The difference between 10- and 30-year yields widened as traders bet the Fed will conclude its current program of long- term bond buying as scheduled in June. The spread increased to 1.20 percentage points, the most since February. The average over the past decade is 0.69 percentage point. U.S. central bankers have purchased $2.3 trillion of bonds in two rounds of so-called quantitative easing known as QE1 and QE2.
“There’s less chance of QE3,” said Kei Katayama, who buys Treasuries at Daiwa SB Investments Ltd., which oversees the equivalent of $62.1 billion from Tokyo, including Asia’s second- largest mutual fund. “It’s gradual and steady growth for the U.S. economy. Eventually, yields will go up.”
Benchmark 10-year rates were little changed at 1.92 percent as of 10:31 a.m. in Tokyo, according to Bloomberg Bond Trader data. The price of the 2 percent security due in February 2022 was 100 22/32. The record low was 1.67 percent set Sept. 23.
Japan’s 10-year yield fell 0.5 basis point to 0.88 percent, the least since October 2010. A basis point is 0.01 percentage point.
Manufacturing, Jobs
The Institute for Supply Management Inc.’s U.S. factory index probably fell to 53 in April from 53.4 in March, according to the median estimate in a Bloomberg News survey of economists before the report today. The Tempe, Arizona-based ISM group’s gauge of service industries on May 3 will drop to 55.3 from 56, another survey showed.
Payrolls rose by 162,000 in April after a 120,000 gain in March, while the jobless rate stayed at 8.2 percent, according to economists before the Labor Department report May 4.
The Fed upgraded its view of the economy on April 25, and Chairman Ben S. Bernanke said he is ready to add to stimulus if necessary.
The central bank plans to buy as much as $5.25 billion of Treasuries due from May 2020 to February 2022 today, according to the Fed Bank of New York’s website. The purchases are part of its effort, known as Operation Twist, to replace $400 billion of shorter-term debt in its holdings with longer maturities by the end of June to hold down borrowing costs.
Fed Rate
The Fed has also pledged to keep its target for overnight bank lending at almost zero until at least late 2014.
The U.S. is scheduled to announce tomorrow the sizes of 3-, 10- and 30-year auctions scheduled for next week.
The government will probably sell $32 billion of 3-year notes, $24 billion of 10-year securities and $16 billion of the so-called long bond over three days starting May 8, according to Wrightson ICAP LLC, an economic advisory company in Jersey City, New Jersey.
There will be $36.7 billion of Treasury securities maturing and available for reinvestment, 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 Treasury market handed investors a 1.5 percent gain in April, according to Bank of America Merrill Lynch indexes.
For the first time since the start of 2008, bonds were the only investments to provide positive returns amid renewed concern the global economy is slowing and as widening deficits in Europe threaten contagion.
Fixed Income
Fixed-income assets -- from Australian government debt to U.S. Treasuries to global junk bonds -- gained 0.57 percent last month through April 27 including reinvested interest, according to Merrill Lynch data. The MSCI All-Country World Index of stocks lost 1.1 percent including dividends while the Standard & Poor’s GSCI Total Return Index of metals, fuels and agricultural products fell 0.5 percent. The U.S. Dollar Index (DXY) dropped 0.29 percent.
“Concerns of an economic slowdown and renewed risks over Europe are the biggest drivers,” Anthony Valeri, a market strategist in San Diego at LPL Financial, which oversees $330 billion, said April 26 in a telephone interview. “There’s renewed concerns about Europe, and Spain in particular.”
Investors sought the perceived safety of fixed-income investments after U.S. job growth in March failed to meet economists’ forecasts and amid growing concerns that European leaders will fail to manage their debt loads.
To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net;
