Treasuries Rally on Speculation U.S. Consumer Confidence Waned
By Anchalee Worrachate and Wes Goodman
March 25 (Bloomberg) -- Treasuries rebounded, led by 10- year notes, on speculation industry reports will show U.S. consumer confidence fell this month to a five-year low and home prices slumped.
The gains drove the yield on 10-year notes down as much as 6 basis points to 3.49 percent. Treasuries tumbled yesterday and 10-year yields rose the most in four years after JPMorgan Chase & Co. quadrupled its offer for Bear Stearns Cos., removing the risk that the securities firm would collapse.
``The worst is far from over,'' said Sean Maloney, a fixed- income strategist in London at Nomura International Plc. ``The market realized the development yesterday may have improved sentiment, but was not necessarily a solution to the problem. Yields have further scope to fall.''
The yield on the 10-year note fell 3 basis points to 3.53 percent as of 7:25 a.m. in New York, according to bond broker Cantor Fitzgerald LP. The price of the 3 1/2 percent note due February 2018 rose 7/32, or $2.19 per $1,000 face amount, to 99 24/32. Two-year yields declined 1 basis points to 1.80 percent.
The Conference Board's confidenceindex dropped to 73.5, from 75 in February, the lowest since March 2003, according to the median estimate of 61 economists surveyed by Bloomberg News. The board is scheduled to issue its report at 10 a.m. in New York.
Six-Week Low
The difference in yield, or spread, between the benchmark 10-year and two-year note fell to 173 basis points, the lowest in six weeks, as investors bet slowing economic growth will cool inflation. The spread between the 10- and 30-year yield was 82 basis points, down from this year's peak of 101 basis points on March 10.
``A couple of years from now, we will see in the 10- and 30-year area lower yields than we've seen since the end of World War II,'' Lacy Hunt, a chief economist at Hoisington Investment Management Co. in Austin, Texas, said in an interview yesterday. ``Inflation is in the process of topping out.''
The Wasatch-Hoisington U.S. Treasury Fund returned 5.56 percent in the past month, beating 98 percent of its competitors, according to data compiled by Bloomberg.
The spread between yields on 10-year Treasury Inflation- Protected Securities and conventional notes, which represents the inflation rate traders expect in the coming decade, narrowed 3 basis points to 2.29 percentage points. It was as low as 2.25 percentage points, the least since Feb. 8.
Crude oil fell for a fourth day from last week's record of $111.80 a barrel on speculation the slowing U.S. economy will curb demand in the world's largest energy user.
Treasury Auction
The Treasury will sell $28 billion of two-year notes tomorrow, the largest amount since auctions began in 1972, and $18 billion of five-year debt the next day.
The Federal Reserve has lowered its benchmark interest rate by 3 percentage points in six reductions since Sept. 18 as the fallout from the collapse of the subprime-mortgage pushes the economy into a recession.
Futures contracts on the Chicago Board of Trade show a 72 percent chance the Fed will trim its target for overnight loans between banks by another quarter-percentage point to 2 percent on April 30.
``The U.S. economy is headed for a recession,'' said Jeremy Wu, who oversees $1 billion of U.S. bonds as a division manager at Shinkong Life Insurance Co., Taiwan's second-largest insurer, in Taipei. ``Treasury yields can't rise too high. The Fed has to keep cutting.'' Wu said he would consider buying if 10-year yields rise past 3.6 percent.
Treasuries Versus Bunds
Treasuries outperformed European bonds on speculation the Fed will continue to cut borrowing costs at a more aggressive pace than its European counterpart. The yield spread between 10- year notes and German bunds of the same maturity widened to 35 basis points, from 20 basis points yesterday.
``The Fed is seen as acting most aggressively among central banks,'' said Steve Major, head of fixed-income strategy at HSBC Holdings Plc in London. The European Central Bank will wait until the second quarter before it starts cutting interest rates, he said.
U.S. government notes also rebounded before a S&P/Case- Shiller home-price index that economists said will today show a decline for January and a Fed Bank of Richmond manufacturing index they forecast will be negative for a fourth month. Consumer prices in the U.S. were unchanged in February, following a 0.4 percent gain in January, Labor Department figures showed this month.
Default Insurance
Treasuries tumbled yesterday as stocks rallied and Federal Home Loan Banks were freed to increase their purchases of mortgage-backed bonds by about $150 billion, diminishing the appeal of government debt.
Yesterday's 22 basis-point increase in the 10-year yield was the most since April 2, 2004. Yields also surged that day after a Labor Department report showed the economy created the most jobs in about four years.
High-yield, high-risk bonds have had their worst start to a year on record, and the biggest investors, including John Hancock Advisers LLC, OppenheimerFund Inc. and Fidelity Investments said there's no recovery in sight.
Still, the cost of protecting bonds from default fell in Europe today. Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-risk, high-yield credit ratings dropped 43.5 basis points to 549.5 today, according to Deutsche Bank AG.
Banks' willingness to lend increased, according to the so- called TED spread, the difference between what lenders and the government pay to borrow for three months. The spread narrowed to 1.38 percentage points, the least in two weeks.
The difference between the rate banks charge for three- month dollar loans relative to the overnight indexed swap rate, the so-called Libor-OIS spread, shrank to 0.57 percentage point, the smallest gap in a week. The Fed takes the OIS rate to set the minimum bid at the auctions it uses to make short-term loans to banks. |
