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Treasuries Fall as Obama’s Plans Fuel Demand for Corporate Debt
Jan. 28 (Bloomberg) -- Treasuries fell, led by 10-year notes, on speculation President Barack Obama’s plans to revive the economy will spark demand for higher-yielding corporate debt.
Company bonds offer “terrific value,” said Fritz Meyer, senior market strategist in Houston at Invesco Aim Advisors Inc. Treasuries dropped 1.6 percent this month, eroding a 14 percent gain from 2008 that was the most in 13 years. Investors in corporate debt earned 1.8 percent since the start of January, Merrill Lynch & Co. indexes show.
“The flight to quality is coming to an end,” said Kazuaki Oh’e, a debt salesman in Tokyo at CIBC World Markets Japan Inc., part of Canada’s fifth-biggest bank. “That’s going to send bond yields higher” in the Treasury market. Investors should purchase high-grade corporate debt, Oh’e said.
Ten-year yields rose four basis points to 2.56 percent as of 9:05 a.m. in London, according to BGCantor Market Data. The 3.75 percent security due in November 2018 dropped 11/32, or $3.44 per $1,000 face amount, to 110 8/32.
The rate has climbed from a record low of 2.04 percent set Dec. 18 and it compares with an average of 4.56 percent this decade. A basis point is 0.01 percentage point.
The difference between two- and 10-year rates narrowed to 1.69 percentage points, the least in a week, indicating greater demand for the higher yields offered by longer maturities. Investors seeking larger returns helped push up the MSCI Asia Pacific Index of regional shares by 0.8 percent, its second straight gain.
Narrower Spreads
Merrill’s index of U.S. corporate and high-yield bonds yields 7.40 percentage points more than Treasuries, compared with a spread of 8.96 percentage points on Dec. 18, after buyers agreed to narrower spreads when purchasing debt. Washington Post Co., the newspaper publisher, raised $400 million yesterday in its first bond sale since 1999.
Obama lobbied lawmakers yesterday to win approval for $825 billion of spending programs and tax cuts. The Federal Deposit Insurance Corp. may run a proposed “bad bank” to buy toxic assets from lenders, two people familiar with the matter said.
“It’s very likely that the economy will turn higher in the second half of the year,” Invesco’s Meyer said yesterday on Bloomberg Television. His company had $448 billion in assets as of Sept. 30.
Recession Concerns
The U.S. economy will contract in the first half of 2009 and expand in the second, a Bloomberg survey of banks and securities companies shows.
The Federal Reserve will refrain from raising interest rates from record lows when it finishes a meeting today, futures contracts on the Chicago Board of Trade indicate.
Fed Chairman Ben S. Bernanke trimmed the target for overnight lending between banks to a range of zero to 0.25 percent at the previous policy meeting on Dec. 16 to help unclog credit markets.
The central bank may not be ready to start buying long-term Treasuries, Jan Hatzius, chief U.S. economist at Goldman, Sachs & Co. wrote to clients yesterday. The policy committee said last month it was “evaluating the potential benefits” of the purchases.
Some policy makers may “still worry about inflationary risks,” Hatzius wrote. Goldman is one of the 17 primary dealers that underwrite U.S. debt.
Inflation expectations increased this month as Timothy Geithner was sworn in as Treasury secretary and promised to help Obama push through his economic plans.
Real Yields
The difference between rates on 10-year notes and Treasury Inflation Protected Securities, which reflects the outlook among traders for consumer prices, was at 81 basis points, the most in 11 weeks. The U.S. recession brought the spread down from 2.31 percentage points six months ago.
The real yield, what investors get from 10-year notes after inflation, was 2.50 percent. Consumer prices increased 0.1 percent in 2008, after rising 4.1 percent the previous year.
The risk for bears in the Treasury market is that the demand for safety that sent government securities surging last year will pick up again as gross domestic product shrinks.
“Yields are going to fall because of the bad economy,” said Kei Katayama, who oversees $1.6 billion of non-yen debt as leader of the foreign fixed-income group in Tokyo at Daiwa SB Investments Ltd., part of Japan’s second-biggest investment bank. “That will continue for a while.”
Ten-year yields will be 2 percent to 2.5 percent through March 31, he said.
Auction Results
Treasuries climbed yesterday as demand rose at a record $40 billion two-year note auction. Investors bid $2.69 for every $1 of debt on offer, rising from $2.13 at the prior sale last month. The U.S. is scheduled to sell $30 billion of five-year notes tomorrow, the most ever.
Government efforts to restore trading in credit markets that froze last year are beginning to show results, DB Advisors, the institutional asset management arm of Deutsche Bank AG, said in a report today.
Markets for interbank lending, mortgages and commercial paper show “notable improvements,” economists led by Joshua Feinman in New York wrote for DB Advisors. Deutsche Bank, the parent company, is another primary dealer.
The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, shrank to as little as 98 basis points on Jan. 15 from 4.64 percentage points on Oct. 10. The narrowing began to reverse this month, pushing the spread out to 1.06 percentage points today.
Libor Steady
The London interbank offered rate, or Libor, for three- month dollar loans was little changed at 1.18 percent yesterday, near a three-week high. It tumbled in the final months of 2008 from 4.82 percent in October.
About $245 billion of 90-day commercial paper that companies sold to the Fed starting in October will mature this week and next, central bank data show. As much as $50 billion to $70 billion of the debt may be rolled over and bought by investors, according to Barclays Capital in New York.
U.S. mortgage rates have yet to recover to earlier levels. 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, or 2.5 percentage points more than 10- year Treasury yields. The spread has averaged about 1.8 percentage points over the past five years.
To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net . Anchalee Worrachate in London at aworrachate@bloomberg.net
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