Treasuries Head for Biggest Monthly Loss Since 2004 Before Sale
By Daniel Kruger and Anchalee Worrachate
Jan. 29 (Bloomberg) -- Longer-term Treasuries fell, with U.S. debt headed for its biggest monthly loss since 2004, as the government prepared for a second record note sale this week and the House of Representatives passed President Barack Obama’s economic plan.
Yields on U.S. securities due in five years or more rose after the Federal Reserve failed to provide a timetable yesterday for its plan to buy long-term Treasuries to keep borrowing costs low. Today’s $30 billion five-year note sale follows a $40 billion two-year auction on Jan. 27 as Obama planned to increase borrowing to unprecedented levels to end the U.S. recession.
“People want to see them come in and do something,” Michael Franzese, head of government bond trading for Standard Chartered in New York, said of the Fed. “You can jawbone us down a couple of times, but you’ve got to be ready to act. How long before they actually do something?”
The yield on the benchmark 10-year note rose four basis points, or 0.04 percentage point, to 2.70 percent at 11:46 a.m. in New York, according to BGCantor Market Data. The price of the 3.75 percent security due in November 2018 declined 10/32, or $3.13 per $1,000 face amount, to 108 31/32. The 30-year bond yield was up three basis points to 3.45 percent after touching 3.48 percent, its highest since Dec. 1.
Five-year note yields increased three basis points to 1.72 percent, up from 1.539 percent, the high yield of the securities at the Dec. 23 auction. Investors bid for 2.06 times the amount of debt on offer at that sale. The average at the past 10 auctions is 2.12.
Government bonds dropped 2.3 percent in January, according to Merrill Lynch & Co.’s U.S. Treasury Master index, the steepest decline since April 2004.
‘Supply Indigestion’
“Higher yields are driven primarily by supply indigestion and improvement in risk appetite at the start of the year, which damped demand for safe-haven bids,” said Richard McGuire, fixed-income strategist at Royal Bank of Canada in London. “Near-term, the market may push bond yields higher to test the resolve of the Fed.”
Longer-term debt pared losses as a Commerce Department report showed new-home sales in the U.S. fell in December to an annualized pace of 331,000, the lowest level since at least 1963. Durable goods orders dropped 2.6 percent in December, more than economists forecast, another Commerce report showed. The Labor Department said continuing claims for jobless benefits rose to 4.776 million in the week ended Jan. 17, the highest since record-keeping started in 1967.
$2.5 Trillion
The U.S. will probably borrow a record $2.5 trillion this fiscal year ending Sept. 30, versus $892 billion in notes and bonds sold in the prior 12 months, according to Goldman Sachs Group Inc., one of 17 primary dealers trade government securities with the Fed.
Western Asset Management, the Pasadena, California-based investor with $586 billion in fixed-income assets, recommended corporate bonds in a statement today. U.S. company debt returned 1.6 percent in January as Treasuries declined, Merrill Lynch indexes show.
Conair Corp. Treasurer John Vele moved two-thirds of the hair-care appliance maker’s excess cash to money-market funds from government bonds this month to boost his annual return to 1.5 percent from 1.25 percent.
“If we can pick up yield, well, thank God,” Vele said from his office in Stamford, Connecticut.
‘Cautious’ Willingness
The “panic mentality” that sparked a flight to Treasuries after Lehman Brothers Holdings Inc. went bankrupt in September has given way to a “cautious” willingness to return to company debt, said Edward E. Liebert, chairman of the National Association of Corporate Treasurers, based in Reston, Virginia.
U.S. securities tumbled yesterday after the Fed failed to go beyond saying it is prepared to buy government Treasuries as a way to reduce borrowing costs “if evolving circumstances” show a need. The declines are eroding 2008’s 14 percent gain, which was driven by investors seeking the relative safety of bonds to protect them from a shrinking economy.
“ If the markets become disorderly, I think they would be coming in,” said George Goncalves, chief Treasury and agency strategist with Morgan Stanley, another primary dealer. “It’s probably a little too early, but if there’s a massive back-up in rates anything’s possible.”
Two-year yields were within about 30 basis points of their record low because of slowing economic growth around the world. The U.S. gross domestic product won’t grow again until the second half of 2009, a Bloomberg News survey of banks and securities companies showed.
Inflation Expectations
The real yield, what investors get from 10-year notes after inflation, was 2.57 percent, near the highest in 16 months. Consumer prices increased 0.1 percent in 2008, after rising 4.1 percent the previous year. Deflation is a general drop in prices for goods and services.
The difference between rates on 10-year notes and Treasury Inflation Protected Securities, which reflects the outlook among traders for consumer prices, widened as the U.S. House passed Obama’s $819 billion economic stimulus passage.
The spread increased to 98 basis points from nine basis points at the end of last year. The U.S. recession brought the figure down from 2.34 percentage points six months ago.
Thirty-year fixed home-loan rates were about 5.12 percent in the U.S. last week, according to mortgage-finance company Freddie Mac in McLean, Virginia. The figure was 2.5 percentage points more than 10-year Treasury yields, versus an average spread of about 1.8 percentage points over five years. |
