Treasuries Drop as U.S. May Announce $60 Billion of Debt Sales
March 4 (Bloomberg) -- Treasuries fell, extending the worst losses in five years, on speculation the U.S. will announce plans tomorrow to sell $60 billion of debt next week as it borrows record amounts to spur the economy.
Notes dropped even after global stock markets tumbled this week, raising concern that increasing supply is overwhelming demand for the relative safety of government debt. Kyle Bass, the hedge-fund manager who made $500 million in 2007 betting on declines on subprime mortgages, said government borrowing around the world is creating a “potential inflationary time bomb.”
“Supply is pushing yields higher,” said Peter Jolly, head of market research at National Australia Bank Ltd.’s investment- banking unit in Sydney. “As stock markets are making lows, you would have thought that would send Treasury yields lower. I fear the supply concerns are gaining the upper hand.”
The yield on the 10-year note rose eight basis points to 2.96 percent as of 8:25 a.m. in London, according to data compiled by Bloomberg. The price of the 2.75 percent security due in February 2019 dropped 23/32, or $7.19 per $1,000 face amount, to 98 5/32. A basis point is 0.01 percentage point.
Ten-year yields will be between 2.75 percent and 3.25 percent for the next few months, Jolly said, increasing his target range by a quarter percentage point from last week.
Yields, which dropped to a record 2.04 percent on Dec. 18, have averaged 4.64 percent for the past decade.
The U.S. will probably sell a record $33 billion of three- year notes on March 10, $17 billion of 10-year debt the following day and $10 billion of 30-year bonds on March 12, according to Wrightson, a research unit of the world’s largest inter-dealer broker. The auctions follow $94 billion of note sales last week.
Steepest Loss
Treasuries handed investors a loss of 3.6 percent in the first two months of 2009, the steepest decline since July 2003, when they fell 4.2 percent, according to Merrill Lynch & Co.’s U.S. Treasury Master index.
The yield on the benchmark 10-year yield has risen from 2.21 percent at the start of 2008, even though the MSCI World index has fallen 19 percent.
U.S. 10-year yields and the MSCI index have a correlation of 0.72 over the past year, according to data compiled by Bloomberg. A figure of 1 shows the two move in lockstep. The correlation is only 0.1 for the past month.
Federal Reserve Chairman Ben S. Bernanke and Treasury Secretary Timothy Geithner said yesterday policy makers may increase aid to the banking system beyond the $700 billion already approved even at the cost of soaring fiscal deficits.
Seeking Approval
President Barack Obama’s administration is seeking congressional approval for a budget of $3.55 trillion for the fiscal year beginning in October.
Confidence in government and central bank leadership is plummeting globally, sending investors to buy “old fashioned stores of value” such as precious metals, Bass, managing partner of Dallas-based Hayman Advisors LP, said in a letter to clients this week.
U.S. yields indicate inflation forecasts rose this year.
The difference between rates on 10-year notes and Treasury Inflation Protected Securities, or TIPS, which reflects the outlook among traders for consumer prices climbed to 93 basis points from 9 basis points on Dec. 31.
Consumer prices were unchanged in the 12 months ended Jan. 31, the Labor Department said Feb. 20, which shows bond investors aren’t losing anything to inflation.
Yield Curve
Investors are already demanding more to hold the government’s long-term debt.
The difference between two- and 10-year yields widened to 2.03 percentage points, near the most since November, from as low as 1.25 percentage points late last year.
A technical indicator some investors use to identify targets suggests the Treasury-market selloff will pause.
The Fibonacci series of numbers indicates 10-year yields need to hold above 3.07 percent if they are to rise further, according to data compiled by Bloomberg. Yields approached that level twice in February and failed to break through each time.
The figure is a 50 percent retracement of the decline in yield from 4.1 percent on Oct. 15 to the record low of 2.04 percent on Dec. 18. A move past one target in the series indicates the rate may fall or rise to another level.
A Bloomberg survey of banks and securities companies projects 10-year yields will fall to 2.64 percent by June 30.
Credit Markets
Yields suggest the government and central bank have yet to restore credit markets to where they were before a rout that began in 2007 and worsened last year.
The difference between what banks and the Treasury pay to borrow for three months, the so-called TED spread, narrowed to 1.01 percentage points from 4.64 percentage points in October. The gap averaged 0.27 percentage point from 2002 through 2006.
The London interbank offered rate, or Libor, for three-month dollar loans, rose to 1.27 percent as of yesterday, from 1.08 percent on Jan. 14.
Average 30-year fixed mortgage rates climbed to 5.07 percent in the seven days ended Feb. 26 from 4.96 percent in the middle of January, according to loan-finance company Freddie Mac.
Rates are more than 2 percentage points higher than 10-year Treasury yields, versus 1.74 percentage points five years ago.
The “steady drumbeat of Treasury auctions” will help send yields higher this year, said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York.
“At some point the financial landscape is going to be a calmer place and people are going to feel better about the financial markets, and that’s going to take away the safe-haven buying,” said Rupkey at Bank of Tokyo-Mitsubishi, part of Japan’s largest lender. Ten-year yields may rise to 3.8 percent by year-end, he said in an interview yesterday.
To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net .
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