Treasuries May Fall as $100 Billion of Debt Overwhelms Buyers
Jan. 17 (Bloomberg) -- Treasury yields may rise in coming weeks as the U.S. government overwhelms investors with $100 billion of debt sales.
The Treasury plans to borrow $171 billion between January and March to pay for rebuilding after Hurricanes Katrina, Rita and Wilma, $27 billion more than in last year's first quarter. Banc of America Securities LLC analysts forecast about 60 percent of the sales will take place by Feb. 9.
A JPMorgan Chase & Co. survey on Jan. 9 showed investors in the $4 trillion Treasury market are the most bearish on government debt since September. The Treasury's auction of $13 billion of five-year notes on Jan. 11 drew the least demand since April. Companies added to the strain with a record $37.9 billion of bond sales last week.
``I don't want to get overly bearish,'' Ted Ake, co-head of U.S. Treasury trading at Mizuho Securities USA Inc. in New York, said Jan. 12. ``But we're getting a ton of supply, and not just Treasuries.''
The yield on the benchmark 10-year note reached 4.46 percent on Jan. 11, the highest since Dec. 22, before ending the week down 2 basis points at 4.36 percent in New York, according to New York- based bond broker Cantor Fitzgerald LP. The price of the 4 1/2 percent note due in November 2015 closed at 101 3/16. Yields move inversely to bond prices. A basis point is 0.01 percentage point.
`Tipping Point'
``We are at a tipping point now where people may decide yields should go higher and more supply may increase the chances of that,'' Christopher Mahony, who invests $2 billion of bonds at J&W Seligman & Co. in New York, said in a Jan. 11 interview.
Yields are too low given interest-rate futures show traders expect the Federal Reserve to raise interest rates by a quarter of a percentage point at its next two meetings, Mizuho's Ake said. All 31 economists surveyed by Bloomberg say policy makers will raise borrowing costs to 4.5 percent from 4.25 percent when they meet on Jan. 31.
Government sales in the next month include 20-year Treasury Inflation-Protected Securities, or TIPS on Jan. 24 and two-year notes on Jan. 25. The Treasury holds its quarterly refunding the week of Feb. 6 when it sells three-year notes, 10-year notes and, for the first time since 2001, 30-year bonds. The amount of those sales will be set Feb. 1.
``The machine has been turned on and we are going to see a lot of paper hitting the street,'' said James Collins, an interest- rate strategist in Chicago at Citigroup Global Markets Inc. ``That will be an overall negative for bonds,'' he said in a Jan. 11 interview.
Week-Ending Rally
Banc of America forecasts $10 billion of 20-year TIPS and $20 billion two-year notes. The refunding will include $20 billion of three-year debt, $13 billion of 10-year securities and $15 billion of 30-year bonds, the firm's analysts said.
``Traders normally try to use the supply story to push rates higher,'' George Goncalves, a fixed-income strategist in New York at Banc of America, said Jan. 11. Ten-year yields will reach 4.75 percent by April, he said. The firm is among the 22 primary dealers of U.S. government securities that are obligated to bid at the Treasury's debt auctions.
Companies may increase the supply of debt. Banc of America strategists said corporate bond sales may reach $90 billion this month, the most since May 2001, as borrowers rush to sell ahead of the Treasury and before the Federal Reserve meets.
Ten-year Treasuries ended last week with their biggest two- day rally since mid-December after government reports showed producer prices excluding food and energy and retail sales increased less than analysts forecast.
``The market shouldn't have trouble absorbing the new supply,'' said David Glocke, who manages about $9 billion in Treasuries at Valley Forge, Pennsylvania-based Vanguard Group Inc., the second-largest U.S. mutual fund company. Glocke spoke in a Jan. 11 interview.
`Mediocre at Best'
The success of coming auctions depends on demand from foreign investors, who hold about 52 percent of U.S. government debt, said J&W Seligman's Mahony, who is ``inclined to be a buyer'' of Treasuries.
Indirect bidders, which include foreign central banks, bought 28.5 percent of last week's five-year note auction, down from 44 percent in December.
JPMorgan's sentiment index fell to minus 32 in the week ended Jan. 9, from minus 22 the prior week. The reading was the lowest since minus 50 for the week ended Sept. 12. JPMorgan compiles the index by subtracting the percentage of investors expecting a drop in prices from those forecasting a rise.
Treasuries posted their biggest two-day slide in a month after the government received $2.10 of bids for every $1 sold of the five-year notes. The bid-to-cover ratio, a measure of demand, for the past 12 auctions averaged $2.5.
``The results are mediocre at best,'' Rick Klingman, head of U.S. Treasury trading at primary dealer ABN Amro Inc. in New York, said after the auction. ``Given the amount of corporate supply coming and the refunding announcement around the corner, it's not a good sign.'' |
